UPDATE: Two-Pot Retirement System – Noteworthy proposals made on 25 October 2023
On 25 October 2023 National Treasury and SARS addressed the Parliamentary Standing Committee on Finance on their proposals regarding the two-pot retirement system. The Draft Tax Bills are to be tabled on 1 November 2023 and a parliamentary session is scheduled for 21 November 2023, when the final decisions on the proposals will hopefully be clarified.
A draft response document was released, in which the following noteworthy proposals are made:
- Implementation date to be postponed to 1 March 2025.
- Seed capital to be increased to R30 000. In other words, it remains at 10% of the member’s benefit in the fund, but capped at R30 000. This amount may be allocated to the savings component after the implementation date, but the calculation must be backdated to the implementation date.
- Tax withholding system for savings withdrawals to be introduced, where SARS will indicate the correct tax rate to the fund administrator (as it currently does for pensioners with more than one pension income).
- Provident fund members who were 55 years and older as at 1 March 2021 will, by default, be excluded from the two-pot retirement system with the opportunity to opt in should they choose to. Those members who continue to contribute to the vested component, will not have a seed capital amount, and will therefore not be able to make a savings withdrawal. The decision to opt in to the two-pot regime will be left to the fund and members.
- Funds with no active participating members, i.e., funds in liquidation, beneficiary funds, unclaimed benefit funds, closed funds and dormant funds, and pensioners will be excluded from the two-pot retirement system.
- It is proposed that defined benefit funds that are unable to apply the reduction of pensionable service basis, be allowed to use an alternative method of calculating the value of the two-pot system contribution split. The application of this alternative method should be fair and equitable and will be subject to approval by the Financial Sector Conduct Authority to ensure financial and actuarial soundness.
- All amounts credited/allocated to a member’s fund credit after the implementation date should be split proportionally into the savings component (1/3) and retirement component (2/3). This will include risk benefits. However, contributions received after the implementation date, but in respect of a period before the implementation date, will still be allocated to the vested component.
- Upon retirement, a member will have three options in respect of their savings component:
- make a withdrawal, which will be taxed in accordance with the retirement lump sum tax table;
- transfer a portion or the full value to the retirement component, from where it will have to be annuitised; or
- leave the balance in the savings component, which may be withdrawn in accordance with the savings withdrawal rules and will be taxed at marginal rate.