At the end of July, the National Treasury released several Draft Tax Bills for public comment. This article unpacks the proposed 2022 Draft Revenue Laws Amendment Bill which contains key amendments on retirement reform, specifically the move toward a “two-pot” retirement system.

First raised in Finance Minister Enoch Godongwana’s Budget speech in February this year, as the name suggests under the proposed “two pot” system, retirement savings will be divided into two pots. The savings pot (one-third or 33.33% of their retirement savings) will be accessible for emergencies and the second “retirement” pot – containing the remaining two-thirds – will be ringfenced until actual retirement. Longer standing members in retirement funds will have access to a third pot – a “vested” pot or the amounts accumulated before the implementation date.

Members will, however, only be able to access their savings pot once a year with the minimum withdrawal being R2 000. All or part of the amount accumulated in the savings pot up to the allowable withdrawal date each year can be taken out.

Treasury also proposes that individuals will only be taxed at their marginal tax rate on these withdrawals, unlike the current situation where tax rates are higher if pre-retirement withdrawals are made before retirement age.

The changes will affect all forms of retirement funds including company funds, umbrella funds, retirement annuities, provident funds and the Government Employees Pension and Preservation Funds.

Why now?

The amendments aim to enable South Africans to save not only for retirement but also for emergencies and unforeseen circumstances. This comes on the back of the COVID-19 pandemic, which saw many individuals receiving reduced salaries and having to resign so they could access their retirement funds.

The amendments would negate this situation and provide greater flexibility as it enables South Africans to access their retirement funds during their working life for non-retirement purposes, like emergencies. This cash injection will definitely help alleviate unforeseen financial pressure, yet ensure the preservation of the bulk of the individual’s retirement savings.

The planned implementation date for the new retirement system is March 2023 although Treasury says this is probably optimistic given the changes to fund rules and systems as well as the need to educate members about the reform and its implications. In addition, SARS also has some work to do as it needs to create capacity to cater for the new pots and be able to track withdrawals.

The Rationale

Treasury says that the new retirement system allows for far greater flexibility.

The present system has not been without its weaknesses, the greatest of which is the lack of preservation before retirement. When changing or leaving a job in most instances, individuals can access their pension funds or provident funds in full and despite the introduction of higher tax rates for premature savings withdrawals, individuals continue to leave viable employment as it is the only way they can access these funds in the short-term.

This not only puts their long-term retirement savings at risk but also impacts their ability to maintain their standard of living at retirement. When there are no retirement savings in place, the burden falls on the government to look after its ageing citizens.  The need, therefore, to ensure that individuals when retiring have access to some financial means, is critical.

Seeking a solution, the government published a discussion document, “Encouraging South Africans to save more for retirement” in December 2021, which proposed a new retirement fund regime aimed at providing individuals in financial distress some level of access to their retirement funds. This would be in the form of a “two-pot” system for retirement savings as outlined above.

Treasury believes this system will allow for financial resources to be available when needed but at the same time, it will also increase the overall level of savings dedicated to retirement.

Impact on Retirement Funds

These amendments are the culmination of several years of consultations and engagements that took place between the National Treasury, labour unions, fund administrators, industry and other experts. The new system, however, is not without its risks.  Treasury says it has recognised that in allowing for a withdrawal option, many funds may face liquidity risks on implementation whilst the required changes to systems and fund rules may also result in new and higher costs.

The two-pot system proposal does not, therefore, include allowing immediate access to retirement funds. It proposes that contributions to the savings pot would start with the proposed implementation date (1 March 2023) and members would only be able to make withdrawals once sufficient funds have been accumulated.  

Delaying members draw down on a substantial part of their retirement savings could still leave them vulnerable when they retire, not to mention the even greater risk to the overall fund. As more funds are withdrawn, there will be lower investment returns for members as less of their savings are invested.

The two-pot system presents a pragmatic approach to an enduring issue in our society. Survey after survey has shown that only 6% of South Africans can afford to retire comfortably so the draft retirement reforms will provide low-income earners relief from short-term financial pressures without impacting the preservation of their retirement funds.

As your dedicated partners on your wealth planning journey we are here to assist you. Please reach out if you have any questions.