RETIREMENT MATTERS – 4 OF 2022
FSCA Regulation Plan
On 30 June 2002, the FSCA published its Regulation Plan for the next three years (1 April 2022 – 31 March 2025). The plan is intended to support the FSCA in managing how it carries out ongoing legislative review and development of the regulatory framework, in line with its strategic objectives, over the course of the next three years.
Draft Taxation Laws Amendment Bill 2022 proposals
National Treasury published the draft Tax Bills on 29 July 2022, which is open for comments until 12 September 2022. The draft Revenue Laws Amendment Bill deals with the two-pot proposal, while the draft Taxation Laws Amendment Bill (draft TLAB) deals with other tax change proposals.
Draft Revenue Laws Amendment Bill (Two-pot system)
It was proposed that the system will come into effect on 1 March 2023, although National Treasury acknowledged that the date is optimistic, since fund rules need to be amended, system changes will need to be made, funds will have to educate fund members, and SARS will need to create capacity to cater for the new pots.
The two-pot system will be applicable to pension funds, provident funds, preservation funds and retirement annuity funds.
The two-pot system will mean that going forward (from the effective date), all members’ contributions will be split into two different pots, i.e. the savings pot and the retirement pot.
- Funding of the pots
The retirement pot and savings pot will accumulate with contributions from 1 March 2023 (less charges and the risk premiums), which means that there will be no starting balance in either pot. A maximum of one-third of future contributions may be directed to the savings pot, with the remaining contributions directed to the retirement pot. The one-third is a maximum amount, and the member can opt to contribute less than one-third, or nothing, to the savings pot. It is therefore possible for a member to have only a retirement pot. The rules of a fund must provide for the allocation to the different pots.
Although the retirement pot can be a stand-alone pot, the savings pot can never be separated from the retirement pot, or be transferred on its own to a different fund.
Any contributions above the maximum tax-deductible amount of 27,5% of taxable income or R350 000 per annum will flow to the retirement pot. Additional contributions of more than the allowable deduction will therefore not be permitted into the savings pot.
The vested pot will consist of the value of the benefit in a fund on 28 February 2023. No further contributions can be made to the vested pot, except for members of provident funds who were 55 years or older on 1 March 2021, who are able to contribute to the vested pot in terms of the pre-annuitisation regime until they either leave the fund or retire.
- Withdrawals
Amounts contributed to the retirement pot cannot be accessed before retirement. At retirement date, the total value in the retirement pot must be paid in the form of an annuity, except if it does not exceed R165 000.
Amounts contributed to the savings pot can be accessed without the member leaving the service of the participating employer, but only one withdrawal can be made during any twelve month-period. The minimum withdrawal amount is proposed to be R2 000. These withdrawals will be allowed only if enabled by the fund rules.
To discourage unnecessary early withdrawals, withdrawals from the savings pot will be included in the member’s taxable income for that year and the withdrawal tax table will not apply to withdrawals from the savings pot.
Upon exiting employment, the same rules that currently apply, will apply to the vested pot, which means members will be able to receive the vested pot in cash as a withdrawal benefit. At retirement, members will have to purchase an annuity with two-thirds of the annuitisation non-vested portion and be able to receive the annuitisation vested portion in cash.
Full withdrawals from the retirement, savings and vested pots can take place if a member ceases to be a tax resident for a period of at least 3 years (similar to the emigration rule for preservation and retirement annuity funds). In these instances, the vested pot will be taxed in accordance with the pre-1 March 2023 tax provisions, the savings pot will be included in the member’s taxable income and the retirement pot will be taxed in accordance with the lump sum withdrawal tables.
Any amounts available in the savings pot at retirement or death can either be withdrawn in full or transferred to the retirement pot. Where the member opts to withdraw funds from the savings pot as a lump sum on retirement, it will be taxable as a retirement lump sum benefit subject to the retirement lump sum table. This could result in a tax-free withdrawal of up to R500 000 upon retirement.
- Divorce orders
In the case of divorce orders, the division stipulated in the order applies to each pot (vested, savings and retirement). Each pot must therefore be proportionally reduced.
- Transfers
Members will be able to transfer their savings pot and retirement pot to the savings pot and retirement pot in another fund. Transfers can be made into the retirement pot from any other pot, including from the vested pot. No transfers can be made into the savings pot unless they are from the savings pot in another fund.
It is proposed that retirement pots and savings pots cannot be split between funds. A member can, in other words, not transfer a savings pot to another fund without also transferring his retirement pot to that fund.
The proposals in a nutshell:
| Vested pot | Savings pot | Retirement pot | |
| How much retirement money will go into each pot on implementation? | All contributions up to 28 February 2023 will go into the vested pot. | The savings pot will not have any money in it to begin with. | The retirement pot will not have any money in it to begin with. |
| To which pot does retirement fund contributions go? | No contributions will be made to this pot after 1 March 2023, except for members who were 55 or older on 1 March 2021. | A maximum of one-third of a member’s contributions after 1 March 2023 will go to the savings pot. (limited to the tax-deductible portion). | At least two-thirds of a member’s contributions will go to the retirement pot plus any contributions made above 27,5% of taxable income or R350 000. |
| What can a member withdraw before leaving employment? | No withdrawals may be made from this pot. | A minimum of R2 000 per annum may be withdrawn. | No withdrawals may be made from this pot. |
| What can a member withdraw upon leaving employment before retirement? | The full balance may be withdrawn. | The full balance may be withdrawn. | No withdrawals may be made from this pot. |
| What can a member withdraw (receive in cash) upon retiring from employment? | In accordance with the rules applicable before the effective date, and will therefore depend on whether a member of a pension or provident fund. | The full balance may be withdrawn. | No withdrawals may be made from this pot. |
| Tax | In accordance with current taxation regime. | Any withdrawals from this pot will be taxed as income in terms of the PAYE tables.
At retirement it will be taxed in accordance with the retirement tax table if accessed in cash at retirement. |
Since no cash may be taken, the monthly annuity will be taxed as income in terms of the PAYE tables. |
Draft Taxation Laws Amendment Bill (draft TLAB)
The key proposals in the draft TLAB are:
- Transfer of total interest in a retirement annuity fund
Currently legislation provides that only a member’s total interest in a retirement annuity fund may be transferred to another retirement annuity fund. Retirement annuity fund members with more than one contract in a particular retirement annuity fund are therefore restricted from transferring only some contracts from one retirement annuity fund to another retirement annuity fund.
Note: Different contracts in the same retirement annuity fund may be established for one retirement annuity fund member. This can happen if a member of an occupational fund, upon leaving service, transfers to a retirement annuity, thereby starting a contract. Each time the member leaves employment, a different contact may be established in the same retirement annuity fund. Members can also take out a retirement annuity contact to contribute to in their personal capacity.
It is proposed that changes be made to the legislation to allow retirement annuity fund members to transfer one or more of their contracts in a particular retirement annuity fund to another retirement annuity fund. The ability to effect such transfers will however be subject to the following conditions:
- the value of the contract(s) being transferred to the other retirement annuity fund should be more than two times the prevailing de minimis (as the current de minimis is R247 500, the amount transferred into the new retirement annuity fund should exceed R495 000); and
- if the individual is not transferring all existing contracts, the total value of the remaining contracts should be more than two times the prevailing de minimis (as the current de minimis is R247 500, the balance remaining in the transferring fund if only some of the contracts are transferred, should exceed R495 000).
The proposed amendment will come into operation on 1 March 2023.
The proposed change will allow a members of retirement annuity funds the flexibility to diversify their investments by transferring individual contracts in the same fund to another retirement annuity fund.
- Transfer of in-fund living annuities to another fund
The current definition of “living annuity” in the Income Tax Act creates the impression that a living annuity must only be provided by the specific fund to which the member belonged before retirement, meaning that in-fund living annuities may not be transferred to another occupational fund to receive living annuity payments from the new fund.
A change is proposed to the definition of “living annuity” in the Income Tax Act to clarify that a member may transfer a living annuity to another fund. This amendment confirms that a fund with in-fund living annuitants will be able to consolidate into an umbrella fund by transferring those living annuitants across to the umbrella fund.
- Clarifying the compulsory annuitisation and protection of vested rights when transferring to a public sector fund
The annuitisation provisions are subject to the protection of vested rights. The protection of vested rights means that the value of all accumulated retirement interests in provident and provident preservation funds before 1 March 2021 will not be subject to compulsory annuitisation. Vested rights may be transferred to another retirement fund without forfeiting the protection.
If a transfer is however, made to a public sector fund, the current provisions of the legislation would result in the protection of vested rights being forfeited.
It is proposed that the provisions in the Income Tax Act are changed to ensure that historic vested rights remain protected, even if transferred to a public sector fund (irrespective of the date on which such transfer is effected).
The proposed amendment will be deemed to have come into operation on 1 March 2021.
It was further confirmed by National Treasury in the supporting documents, that the compulsory annuitisation provisions also apply to public sector pension funds that operate similarly to provident funds (in other words, more than one-third may be paid as cash at retirement) and as such, members of those public sector pension funds are also subject to the compulsory annuitisation provisions. National Treasury is trying to make changes to make it clear that annuities received from public sector pension funds that operate like provident funds, are taxed in the same way as any other annuities payable. It is not clear why this was of concern to National Treasury, when they are not correcting the current flaw or uncertainty in the compulsory annuitisation provisions for public sector funds.
Technical note as explanation:
The definition of ‘pension fund’ in section 1 of the Income Tax Act refers to various types of pension funds in paragraphs (a) to (d) to the definition. Paragraphs (a) and (b) funds are public sector type of funds, like municipal funds. Paragraph (c) funds are all other funds and paragraph (d) is a recent addition and refers to the GEPF. Annuitisation provisions have always been applicable to only paragraph (c) pension funds, meaning that only paragraph (c) pension funds were required to provide a pension with at least two-thirds of a benefit at retirement. Paragraphs (a) and (b) pension funds were not subject to annuitisation and could provide for more than one-third in cash on retirement. Some public sector funds were therefore recognised as pension funds, although they were allowed, at the retirement of a member, to pay more than one-third of the benefit in cash.
Those funds are still recognised as pension funds and not provident funds. When annuitisation of provident funds was introduced from 1 March 2021, paragraphs (a) and (b) were introduced to the definition of “provident fund” in section 1 of the Income Tax Act to cater for public sector funds. However, it is still not clear whether National Treasury’s view is that paragraph (a) and (b) pension funds should be converted to paragraph (a) and (b) provident funds. Looking at the current wording in the Income Tax Act, the paragraph (a) and (b) pension funds remain paragraph (a) and (b) pension funds.
In terms of the current wording in the Income Tax Act, the new annuitisation provisions (with effect from 1 March 2021) are still only applicable to par (c) pension funds, and not to par (a), (b) and (d) pension funds. It is not necessary to amend the legislation on annuitisation for GEPF (par (d) pension fund) as the GEPF is a defined benefit fund and the benefit pay-outs to members at retirement are already in the form of an annuity. Although National Treasury confirmed in the explanatory memorandum to the draft TLAB that members of par (a) and (b) pension funds are also subject to compulsory annuitisation, neither the current legislation nor the proposed changes cater for this.
- Retirement of a provident fund member on grounds other than ill heath
In terms of the Income Tax Act, if a member of a provident fund retires before the age of 55 for other reasons than ill health, the member’s benefit will be taxed as a withdrawal benefit and not as a retirement benefit. Since a member can retire at any time in a pension fund, it is proposed that this provision be repealed, in line with the harmonisation of all funds to have the same tax treatment.
The proposed amendment will come into operation on 1 March 2023.
- Tax-neutral transfers from a pension fund to a provident fund
With effect from 1 March 2021, transfers to provident funds are tax-neutral, irrespective of the type of retirement funds it transferred from. The wording in the Income Tax Act however, creates the impression that those transfers will only be tax-neutral for contributions made to the transferring fund prior to 1 March 2021.
Amendments are proposed to clarify that contributions to a pension fund made pre- and post-1 March 2021 may be transferred on a tax-neutral basis to a provident fund.
Adjustments to the annual levies payable by financial institutions
Commercial umbrella funds and preservation funds
The levy is an amount of R1 424 per fund plus R16.85 per member for the year and every other person who receives regular periodic payments from such fund (excluding a person whose benefit in the fund remained unclaimed and beneficiaries).
Pension funds (excluding retirement annuity funds, preservation funds and commercial umbrella funds)
The levy is the same as for umbrella funds, or R3 263 702, whichever total amount is the lesser.
Retirement annuity funds
The levy in respect of a retirement annuity fund is an amount of R1 424, plus an additional amount equal to 0.0097% of the value of the assets of the fund.
Levy for the Pension Funds Adjudicator
An amount of R7.34 per fund member and any other person who receives regular periodic payments from such fund, but excluding any member or such person whose benefit in the fund remained unclaimed.
The levies must be paid not later than 31 August of the levy year.
POPIA and PAIA
Information Regulator Enforcement Committee
The Information Regulator (IR) has established its Enforcement Committee in terms of section 50 of the Protection of Personal Information Act (POPIA) on 4 August 2022.
The Enforcement Committee comprises 14 independent experts from different backgrounds such as law, information security, forensics, and criminal investigations. It must consider all matters referred to it by the IR regarding a complaint, an investigation of a complaint, a finding in respect of the complaint, as well as any matter regarding a complaint in terms of the Promotion of Access to Information Act (PAIA).
It is envisioned that the Enforcement Committee will help with finalising the increasing number of complaints by the public regarding the processing of their personal information.
Security compromise notification
As soon as a data breach (security compromise) occurs within a retirement fund or there are reasonable grounds to believe one occurred, the fund’s board must notify the IR and affected members, in line with section 22 of POPIA. The breach must then be investigated by the IR.
To date, there has been no guidance on the format this reporting should take, but on 12 August 2022 the IR published a standard form template and a guidance document on how to complete the form, aimed at standardising and streamlining the process of notification.
The information required includes the date of the incident, an explanation for any delays in reporting it, whether the breach is “confirmed” or “alleged”, the type of incident such as loss, damage or unlawful access of personal information, and the number of members impacted.
The form must be used for all reporting going forward. Funds or information officers must send the completed form to POPIACompliance@inforegulator.org.za
Q&A
Q: Should newly appointed board members complete the existing FSCA Trustee Toolkit or wait for the new Toolkit to become available?
A: The new Toolkit is currently in the development and testing phase and has been sent to some board members as part of the trial. New board members must however, still complete the existing Toolkit within six months of appointment.