The treasury is proposing the two-pot retirement system be implemented from March 1 2024. This is according to draft legislation for the system, which has been published for public comment.
The treasury said in a statement on Friday that the revised Draft Revenue Laws Amendment and Draft Revenue Administration and Pension Laws Amendment bills provide the legislative changes required to implement the first phase of the two-pot retirement system and take into account public comments received on the 2022 Draft Revenue Laws Amendment Bill.
The aim of the proposed reforms is to ensure the preservation of retirement savings for retirement, rather than their withdrawal beforehand when retirement fund members cease employment as often happens.
The Treasury’s second concern is that some households in financial distress have assets within their retirement fund/s that are not accessible in case of emergencies or financial hardship. To combat this, the draft laws propose a retirement regime of three components within retirement funds: one for savings, one for retirement and a vested component.
Savings component
Individuals will be required to contribute an amount of one-third of their total individual retirement fund contributions to the savings component, which will be available for withdrawal before retirement. A member will be allowed to make a single withdrawal within a year of assessment. The minimum withdrawal amount is R2,000.
Retirement component
Two-thirds of total individual retirement fund contributions must go towards the retirement component. This will be required to be preserved until retirement, when it will be paid out in the form of an annuity.
The savings and retirement components constitute the “pots” of the two-pot retirement system. This system will only apply to retirement contributions made after the implementation date of March 1 2024.
Vested component
This component is a member’s total retirement interest in credit immediately before the two-pot system implementation date. It includes the fund’s total interest and all future growth on this amount.
Members of funds should be encouraged to only exercise the withdrawal option as a last resort, and to try [to] preserve their savings for retirement for when they retire.
— Treasury
Retirement funds will be required to value a member’s retirement interest on the day immediately before the implementation date. The rules that apply to the retirement fund under the current regime will continue to apply to the vested component after the implementation of the two-pots system. Once the regime comes into effect, members will no longer be able to make contributions to their vested component.
Current rules that will apply to the vested component include the ability to make one-off withdrawals from preservation funds and the ability to access pension and provident funds upon resignation.
Seed capital
It is proposed that the regime make provision for the creation of seed capital — the starting balance in the savings component — on March 1 2024, which should be available to the member of the retirement fund for withdrawal on the implementation date of the new system.
This starting balance is to be provided in the savings component from the vested component. To limit negative impacts on the liquidity of retirement funds, it is proposed that seed capital should be calculated as 10% of the benefit accumulated in the vested component limited to R25,000 (whichever is the lesser). This will ensure the retirement benefit is not eroded and will enable pre-retirement access to the benefits.
The draft bill covers equitable treatment of defined benefit funds, which will be allowed to calculate the one-third contributions to the savings component based on one-third of the member’s pensionable service increase, and two-thirds contributions to the retirement component based on two-thirds of the member’s pensionable service increase with effect from March 1 2024.
The Treasury proposed that legacy retirement annuity fund policies be exempted from the provisions of the two-pot retirement system, as their inclusion would require a redesign of these historically acquired policies.
The statement said that amendments dealing with withdrawals from the retirement component if a member of the retirement fund is retrenched and has no alternative source of income will be considered in the second phase of the implementation of the two-pot retirement system.
“Further, complementary measures may also be considered in the second phase to ensure that the primary objectives for saving for retirement is not compromised, and to protect the liquidity of such funds at all stages. Members of funds should be encouraged to only exercise the withdrawal option as a last resort, and to try [to] preserve their savings for when they retire.”
The period for public comment on the bills and their explanatory memoranda is the close of business on July 15.
ensorl@businesslive.co.za
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