The Minister of Finance and National Treasury during 2021 on several occasions indicated that discussions are underway on allowing early access to retirement savings. National Treasury on 14 December 2021 published a discussion paper in this regard entitled Encouraging South African households to save more for retirement. The main proposals contained in the discussion paper are as follows.
In terms of a so-called two pot system, which is expected to be implemented in 2023, retirement contributions will be restructured into two pots. The one pot can be accessed at any time, whereas the other pot will not be accessible before retirement and must therefore be preserved until retirement. One third of all future contributions will go into the accessible pot (“the access pot”), and the other two thirds will go into a pot that must be preserved until retirement (“the retirement pot”).
The extent of vested rights on retirement savings accumulated on the implementation date of the two-pot system is still under consideration. It is stated in the discussion paper that comments and options would be welcomed on how vested rights can be protected.
The amount in the access pot will be available at any time, but can only be withdrawn once a year, depending on a fund’s ability to effect withdrawals and subject to a minimum value of, for example, R2 000. If the member made a partial withdrawal, a second withdrawal will however be allowed within the year for any amount remaining in the access pot.
The withdrawing member will have to incur the cost of a withdrawal so that non-withdrawing members do not subsidise the cost of those withdrawing. A member may also be required to undergo retirement benefit counselling or financial awareness before a withdrawal is undertaken. A withdrawal from a retirement fund reduces the member’s retirement savings, and a withdrawing member should be encouraged to increase his/her future retirement contributions to replace what is being withdrawn.
Preservation funds will also be required to implement the two-pot system. Transfers into preservation funds will mirror the structure of the transferor fund. This will enable members to continue to withdraw from the access pot upon transfer to a preservation fund.
Retirement annuity funds will also be included in the two-pot system.
Defined benefit funds, including the Government Employees Pension Fund (GEPF), will likewise be included in the two-pot system. This means that these funds would need to calculate a value for the one third contribution to the access pot at the time the member asks for access, and then sell assets from their wider portfolios to meet that obligation.
One of the questions posed in the discussion paper is whether members should be given immediate access to 10 percent (up to R25 000) of their retirement savings, in other words despite the fact that they have not yet built up an access pot. There are several risks if this were to be allowed, and it is stated in the discussion paper that Government will proceed with caution in this regard.
Due to various reasons the current tax treatment for contributions to, and withdrawals from, the access pot is unlikely to be appropriate. National Treasury will investigate potential alternatives, which could include the following:
- Adding withdrawals from the access pot to the member’s taxable income in the year of withdrawal;
- Removing the tax deduction in respect of contributions to the access pot but making the withdrawal tax-free. In effect, this would create a tax-free savings account within a retirement fund.
- Moving to a flat deduction percentage for contributions. Members could, for example, receive a 30 percent deduction on their contributions, which is unrelated to income. Tax on withdrawals could either be at the same flat rate or could be added to the member’s taxable income for that year.
- Keeping the current tax regime unchanged.
Retirement funds or other clients requiring more information should not hesitate to contact their consultant.