Vickie Lange, Head of best practice, Alexforbes
National Treasury has issued the revised 2023 Draft Revenue Laws Amendment Bill and 2023 Draft Revenue Administration and Pension Laws Amendment Bill for public comment. These drafts propose amendments to enable the implementation of the two-pot system, a significant enhancement to our retirement system. The proposed effective date is 1 March 2024.
The two-pot system represents a milestone in retirement reforms, aiming to improve income for members to live on in retirement and to assist with unexpected expenses when members have no other options. Here’s how it works:
1. Retirement component
- Starting from 1 March 2024, two-thirds (about 67%) of retirement fund contributions must be allocated to a retirement component.
- These savings and investment growth must remain invested until retirement to purchase a retirement income.
2. Savings component
- Starting from 1 March 2024, one-third (about 33%) of retirement fund contributions must be allocated to a savings component.
- Members can withdraw these savings once per tax year if the amount is at least R2,000.
- Members don’t have to leave their job or retire to withdraw from the savings component. Cash withdrawals from the savings component will be taxed at marginal rates.
- Members should keep their savings component invested whenever possible to increase their retirement income or meet their cash needs during retirement.
3. Vested component
- Savings before 1 March 2024, along with investment growth, must be allocated to a vested component.
- Occupational retirement fund members can withdraw these savings if they leave their jobs or retire, subject to current rules for buying an income at retirement.
- Preservation fund members are still allowed one withdrawal before retirement unless they’ve already used this option.
- Retirement annuity fund members can only withdraw up to one-third at retirement.
- Cash withdrawals from the vested component are taxed according to the withdrawal tax table.
A seed capital option is proposed, allowing limited access to retirement savings without resigning. Members can withdraw up to 10% of their savings as of 29 February 2024, but not exceeding R25,000. This option will be available on 1 March 2024 or any time thereafter. Withdrawals will be taxed at the member’s marginal tax rate.
Importantly, the new system only applies from 1 March 2024 and funds will not be able to action any options members elect prior to that date.
Members of provident funds who were 55 or older on 1 March 2021 can choose to participate. Those not opting for the two-pot system will not have the savings and retirement components.
The two-pot system applies to all retirement funds, including defined contribution and defined benefit funds, covering various fund types.
Alexforbes supports these changes due to their positive impact on retirement fund members’ financial futures. Compared to the current system, the two-pot system is expected to improve retirement outcomes by 2 to 2.5 times.
It is essential for members to understand the consequences of withdrawing cash, such as:
- Paying tax
- Having less retirement income
- Having less cash at retirement
It is better to save separately for emergencies, and various investment options are available for this purpose. The savings component in a retirement fund should be a last resort. Seeking financial advice can assist members in making informed decisions about retirement savings.
Trustees should ensure that their funds are proactive in preparing to administer the two-pot system by utilising the latest technology. It is important to adopt the latest engagement approaches to ensure that members are appropriately supported with the aim of improving decision-making.
Alexforbes is preparing for the two-pot system and actively engaging with relevant authorities and organisations. We will provide detailed updates as the legislation progresses and continue assisting trustees, management committees, and members in unlocking the benefits of the two-pot system.