Changes to retirement funds relate mainly to the new two-pot retirement system, but changes are also proposed regarding two retirement tax issued and in respect of the regulation of retirement funds.

Two-pot retirement system

The 2022 tax legislative proposals included draft legislation regarding the “two-pot retirement system which is intended to:

• Allow retirement fund members in financial distress access to their retirement savings prior to withdrawal or retirement; and
• Encourage the preservation of funds for retirement by restricting the ability of members to withdraw from their pension or provident funds on termination of employment.

The original proposal was for the two-pot system (consisting of a “Savings Pot” and a “Retirement Pot”) to come into effect on 1 March 2023. There would also have to be a third pot (the “Vested Pot”) in respect of retirement savings accumulated before the implementation date. However, it became apparent that even if the draft legislation were implemented without any changes, there would not be sufficient time for the retirement fund industry to implement it by 1 March 2023.  Also, there were a number of issues which were not dealt with in the draft legislation which would have to be addressed before the two-pot system could be implemented. Implementation was thus postponed to 1 March 2024.

The Budget Speech contains the following proposals regarding the two-pot system:

• The implementation date remains 1 March 2024;
• It remains anticipated that withdrawals from the Savings Pot will be subject to marginal income tax rates while payments from the Savings Pot on retirement will be subject to the favourable rates applicable to retirement fund lump sum benefits.
• Before implementation, further work will be required regarding the following areas:
  • The original proposal was that the two-pot system would only apply in respect of contributions made on or after the effective date. However, there were many calls for the savings pot to include ‘seed capital’, which effectively means that some of the retirement savings accumulated prior to the implementation date, would be available for withdrawal by the member.
  • Legislative mechanisms will be required to provide for the application of the two-pot system to defined benefit funds; and
  • Consideration must be given to the requests by certain legacy retirement annuity funds to be exempted from the two-pot system.
• A fourth issue relates to the calls for members to be given access to their retirement pots upon retrenchment, should they have no alternative source of income. However, it appears that this will be considered separately, as part of a second phase.

Interestingly, the ‘further work’ is referred to in two parts of the Budget Speech documents but in one of those instances, no mention is made of the issue of ‘seed capital’.

Other tax changes

• An employer contribution to a retirement fund currently constitutes a deemed employee contribution which enables the employee to claim a deduction in respect thereof. This provision will be amended to clarify that it will only be deemed to be an employee contribution if the cash equivalent of the contribution is included in the employee’s income.
• In order to encourage the preservation of retirement funds, the Income Tax Act was amended in 2022 to permit tax-free transfers between retirement funds by members who have reached normal retirement age but have not yet opted to retire.  However, there are certain instances where these transfers will be taxed in respect of members who have been subjected to involuntary transfers to another fund. It is proposed that these transfers should not be taxed, although the value of such retirement interest will be ring-fenced and preserved until retirement.

Other changes

• It is anticipated that National Treasury will in 2023 finalise policy proposals regarding the so-called “auto enrolment” of all formal and informal workers in retirement funds;
• Legislative amendments to improve governance of retirement funds (particularly commercial umbrella funds) will be published in 2023; and
• Further consultations regarding the nearly ZAR 90 billion of unclaimed assets across the financial sector will be held in 2023.  One of these proposals is to establish a fund to which all unclaimed assets should be transferred, while another alternative is for unclaimed assets to be transferred into the National Revenue Fund.