After assimilating feedback from public and industry, National Treasury – together with the South African Revenue Services (Sars) – has chosen to push the proposed implementation date of the “two-pot retirement system” one year later to 1 March 2025.

The new proposed two-pot system (technically three pots) is aimed at allowing retirement fund members the flexibility to access one-third of their savings before retirement while preserving the other two-thirds for retirement. 

In the new system, members of schemes will have three “pots”: vested (the savings built up before the legislation becomes effective); savings; and retirement.

Delayed implementation

Joon Chong, partner at Webber Wentzel, says retirement fund administrators are likely to welcome the delayed implementation as there were many concerns that the initial date of 1 March 2024 would provide far too little time for the industry to have the necessary systems in place, and to enable the required training of staff and members.

Michelle Acton, retirement reform executive at Old Mutual, confirmed this, saying the proposed implementation date for 1 March 2024 would not have been achievable as the legislation has not yet been finalised. 

“It is, however, critical that the legislation is finalised in the next month or two to ensure that funds can be ready for 1 March 2025,” she says.

“We understand that many financially strapped South Africans will be disappointed at the delay, and we call on the government to expedite the promulgation of the legislation to create certainty and to allow for access to the savings in 2025.  

“This latest extension will, however, allow us to fine-tune our preparations, ensuring our customers are well-prepared for the transition and informed about the consequences of accessing their retirement savings prematurely,” said Acton.

“We encourage our clients to update their contact information to receive timely updates and crucial information regarding their retirement products,” she added. 

Seed capital amendments

“The revised draft Revenue Laws Amendment Bill also clarifies that for members younger than 55 on 1 March 2021, seeding capital should be taken equally from the pre-1 March 2021 vested and non-vested pots. 

“Withdrawals from the savings pot may take place at any time from 1 March 2025 (and once in a tax year) and not on a staggered basis, as suggested by some industry commentators,” Chong says.

The changes include an increase in the cap on the seed capital from a maximum of R25,000 in a year to R30,000. The seed capital reduces a member’s vested pot and is transferred to the savings pot as the starting balance.

In a note issued yesterday, retirement funds administrator Alexforbes said it expected the proposed two-pot system to increase retirement savings over the longer term while helping members manage their more urgent financial needs. 

“Based on certain assumptions, the two-pot system will improve members’ retirement outcomes by 2 to 2.5 times compared to the current system. However, the higher limitation on seed capital may result in higher withdrawal amounts from retirement funds. This may result (on average) in an asset outflow impact of 1% to 2% and higher claims volumes for retirement funds. 

“This will mainly be driven by financial distress and higher indebtedness amongst fund members of South African retirement funds. Should this transpire, it will significantly impact fund administrators as they will have to process large claim volumes in a limited time,” the company warned.

Other proposed amendments

Provident fund members who were 55 years or older on 1 March 2021 will be able to opt-in to the two-pot system. In other words, the two-pot system will not automatically apply to these members, as they will have a choice.  

Defined benefit funds that are unable to determine the one-third/two-third split will be able to use an alternative method of calculating the split, as long as the methodology is fair, equitable and approved by the FSCA.

“National Treasury has confirmed that no amendments to regulation 28 to the Pensions Fund Act (which sets limits for permitted investments by retirement funds) are necessary to accommodate the two-pot system, and that the grandfathering provision under regulation 28 will be retained for these funds,” Chong says.

Withdrawals from the savings pot will be taxed at marginal tax rates. 

Alexforbes notes that National Treasury proposed the implementation of a withholding tax process rather than a tax directive process for savings withdrawal claims. Should this be approved, Sars will provide guidance on the correct tax rate to the fund administrator for the tax deduction from a savings withdrawal claim.

Blessing Utete, managing executive of Old Mutual Corporate Consultants, said Old Mutual’s data shows that, on average, most South Africans save only two to three times their annual income for retirement. This is significantly less than the required average of 12 times the annual income required to have an adequate income in retirement.  

“By refraining from accessing their savings prematurely, (fund members) could potentially accumulate 12 times their annual salary,” he says. 

Final legislation may only be available in early 2024. DM