The 2022 Draft Revenue Laws Amendment Bill (“the Bill”), which introduces the so-called two pot system, was published for public comment on 29 July 2022. (More details on the two-pot system are contained in Sanlam Corporate Legal’s August 2022 Legal Report.) The commentary period has expired, and National Treasury has submitted their draft responses to comments received.
The following is of note:
The implementation date of the two-pot system will be postponed from 1 March 2023 to 1 March 2024. This is in response to submissions made by the retirement fund industry to the effect that the proposed implementation date of 1 March 2023 is not feasible given, amongst others, the system changes required to administer the two-pot system.
One of the comments received on the Bill is that the lack of immediate access to their retirement savings will result in members resigning to get such access. National Treasury has in response hereto said that Government is open to allowing once-off seeding capital from the vested pot into the savings pot to provide members with immediate access to a portion of their retirement savings. This is however subject thereto that immediate access should not have adverse implications on liquidity, and that the costs of such immediate withdrawals is not imposed on members choosing not to withdraw.
The mechanism to enable this will require consultation with commentators.
It is unclear how the two-pot system will apply to defined benefit funds. This is because a member’s benefit in such a fund is determined based on a defined formula, without reference to contributions and investment performance. A consultative process will be undertaken with relevant defined benefit funds and stakeholders to consider how the two-pot system should apply to defined benefit funds.
The Bill will be amended to make it clear that members will be required to contribute a third of their contributions into the savings pot, and will in other words not be able to contribute less than a third into the savings pot.
The Bill currently stipulates that a member may not make more than one withdrawal from the savings pot in any 12-month period. It is however not clear how the 12-month period is to be calculated. National Treasury has confirmed that the 12-month period is intended to be a rolling 12-month period, and that the Bill will be amended to make this clear.
In terms of the Bill, the minimum withdrawal amount from the savings pot is R2 000. A member must accordingly have an amount of at least R2 000 in the savings pot before being allowed to make a withdrawal. It is however not clear whether the R2 000 is a gross or net amount. National Treasury has confirmed that the policy intent is for the R2 000 to be a gross amount. The Bill will be amended to make this clear.
The Bill will be amended to enable a member to withdraw the balance in the savings pot if such balance is less than R2 000 upon the member’s exit from the fund.
The policy intent is for the commutation threshold of R165 000 to apply on a cumulative basis to amounts subject to annuitisation (i.e. the retirement pot and two thirds of the vested pot). The Bill will be amended to reflect this intention.
The policy intent is for participation in the two pots regime to be mandatory for all funds. Funds will in other words not have a choice whether or not to implement the two-pot system. The Bill will be amended to reflect this intention.
The policy intent is for provident fund members who were 55 years or older as at 1 March 2021 to be given a choice between one of the following:
- to continue contributing to their vested pot. In such cases 100% of the contributions will be allocated to the vested pot, provided that the member remains in the same fund that he/she was a member of pre-1 March 2021;
- to participate in the two-pot system, with one third of contributions allocated to the savings pot and two thirds to the retirement pot.
All T-day vested rights will remain. The vested pot under the two-pot system will accordingly consist of the T-day vested and non-vested pots as at the implementation date of the two-pot system.
Government acknowledges that changes will need to be made to section 37D of the Pension Funds Act to cater for the two-pot retirement system, and to ensure that section 37D deductions are catered for from the vested and retirement pots when membership of the fund is terminated, or when divorce order settlements become due and payable.
There was a request that so-called legacy retirement annuity products be exempted from participation in the two-pot system as participation would require a redesign of historically acquired insurance policies together with their respective terms and conditions. A consultative process shall be undertaken with the Financial Sector Conduct Authority (FSCA) and stakeholders to assess the merits of this request.
Given that retrenchment is beyond the member’s control, Government proposes that limited income-based withdrawals be permitted from the retirement pot in the case of retrenchment. These withdrawals will be subject to the following conditions:
- the vested and savings pots must have been fully utilised, and access to UIF benefits have been exhausted. The member will therefore be required to prove that he/she has no other alternative income source;
- access to the retirement pot will be provided for a limited period and as a form of annuity, with a maximum per year.
Arrear contributions that relate to a post-implementation period will be allocated to the respective savings and retirement pots. If the arrear contribution relates to a pre-implementation period, the current pre-implementation dispensation will apply. Contributions that became payable before the implementation date of the two-pot system, but which are paid after the implementation date, will in other words be allocated to the vested pot, and not to the savings and retirement pots.
The Bill currently stipulates that all contributions above the tax-deductible limit, being 27,5% of remuneration up to a maximum of R350 000 per annum, will fall into the retirement pot. This provision will be withdrawn as the administrative constraints in this regard are too onerous. Fund administrators do namely not have sufficient information to monitor the member’s position relative to the limit, especially with regard to members who contribute to more than one fund.
Changes will, with regard to tax withholding by fund administrators in respect of withdrawals from the savings pot, be made in the Bill to allow for an administrative mechanism similar to the effective tax rates that are communicated by the South African Revenue Service (SARS) to administrators in the case of taxpayers who receive more than one pension income.
Government acknowledges that what is referred to as “pots” in the Bill are for all intents and purposes components within the respective funds, and will consider an adjustment to the names of the different pots to reflect their component nature. Additional definitions will also, where necessary, be incorporated into the Bill.
The definitions of “savings pot”, “savings withdrawal benefit” and “retirement pot” will be clarified so as to ensure that the policy intent is correctly reflected in the legislation.
The next step is that National Treasury’s responses, as highlighted above, will be considered by Parliament’s Standing Committee on Finance, thereafter the amended Bill will be tabled in Parliament by the Minister of Finance. National Treasury has indicated that they are unable to confirm when the amendments to the Bill will be finalised as this is dependent on further consultation with the retirement fund industry and the required amendments to the Pension Funds Act.
Retirement funds or other clients requiring more information should not hesitate to contact their consultant.