By Deirdre Phillips Wednesday, June 14, 2023

National Treasury released the second draft legislation for the ‘two pot’ retirement system on 9 June 2023 for public comment.  As with the first draft published by National Treasury on 29 July 2022, the proposed changes set out in the 2023 Draft Revenue Laws Amendment Bill (2023 Bill) will have far reaching consequences for the retirement industry, with some welcoming the proposed changes and others not.

As a reminder, the intention behind the proposed changes is to address Government’s two primary concerns, namely, the failure to preserve funds for retirement in instances where members withdraw from their retirement funds on termination of employment; and the inability of households in financial distress to access their retirement savings prior to withdrawal or retirement.

National Treasury advised that the 2023 Bill as well as the 2023 Revenue Administration and Pension Laws Amendment Bill is necessary to implement the first phase of the ‘two-pot’ retirement system, whilst noting that legislative amendments dealing with withdrawals from the ‘retirement component’ in the event of a member’s retrenchment will be considered as part of the second phase of the ‘two-pot’ retirement system.

Certain proposals remain unchanged

In summary, the proposals set out in the 2023 Bill remain the same as per the previous draft Bill, except for a new proposed implementation date of 1 March 2024. In addition, the reference to the various ‘pots’ was changed to ‘components’, although, it is noted that the word ‘pot’ is still used in the colloquial form to describe the reform.

The proposal remains that with effect from 1 March 2024, retirement funds will be required to create three components (pots), namely, the ‘savings component’, ‘retirement component’ and a ‘vested component’.

Members will still be required to contribute one-third of their total individual retirement fund contributions to the savings component and will remain entitled to withdraw amounts from the savings component before retirement without the need to terminate employment.

Further, members will still be required to contribute two-thirds of their retirement assets in the retirement component and will not be permitted to any withdrawals from the retirement component prior to reaching the applicable normal retirement age.

As before, retirement savings up to 29 February 2024 will be ‘grandfathered’ in the vested component and will not be impacted by the new provisions.

So, what is new?

The 2023 Bill proposes the creation of ‘seed capital’ to allow members access to benefits prior to retirement. 

In short, seed capital will be the starting balance in the ‘savings component’ on 1 March 2024 which members will be permitted to withdraw with effect from 1 March 2024.  Based on the current legislative provisions, members are not permitted to withdraw any portion of their retirement savings unless they withdraw from service or retire.  National Treasury, however, proposed that in order to limit the adverse implications on liquidity, the seed capital be calculated as 10% of the value of the assets in the member’s ‘vested component’, subject to a limit of ZAR 25 000, whichever is lesser. 

Defined benefit funds will also be included in the ‘two-pots’ retirement regime, however, specific provisions will apply to defined benefit funds in relation to the various components. 

It is further proposed to exempt legacy retirement annuity fund policies from the ‘two-pots’ retirement system.

Certain consequential amendments are proposed to the Pension Funds Act in order to implement and give effect to the ‘two-pots’ retirement regime.  These amendments are set out in the 2023 Draft Revenue Administration and Pension Laws Amendment Bill and will be covered in a further newsflash. 

Any comments and queries on the proposed two-pot system should be sent to National Treasury at  [email protected]  and SARS at [email protected]  by close of business on 15 July 2023.

A copy of the 2023 Draft Revenue Laws Amendment Bill can be accessed here, a copy of the 2023 Draft Revenue Administration and Pension Laws Amendment Bill can be accessed here, and a copy of National Treasury’s media statement can be accessed here.