Ten Top Tips on the Two-Pot System for Retirement Savings

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On July 29, 2022, the National Treasury published the Revenue Amendment Bill 2022 for public consultation until August 29, 2022 to introduce the “two pots” system for retirement savings which has reported in the national budget.

Read: The two-pot system will not make any retirement savings immediately available

The two-pot system would allow pension fund members to access one-third of their retirement savings once a year, in case of emergency, while preserving the other two-thirds for retirement. This is seen as a better alternative to people resigning from their jobs to access their pensions or provident funds.

The expected implementation date is March 1, 2023, although the Treasury said it was likely optimistic, given the changes needed to fund rules and systems and member training.

Below, we list the “top ten” aspects of how the two-pot system is being considered, according to the draft legislation. In practice, the oldest members of the pension funds will have three pools: the vested pool (sums accumulated before the date of implementation), the savings pool (the accessible third) and the retirement pool (two-thirds of the contributions after March 1, 2023 which must be kept until the date of retirement).

  1. Existing fund members do not have to re-register to access the two-pot system, as existing funds will be scaled to accommodate it. Each fund will have to revise its rules to do so.
  2. Contributions will remain deductible up to specified limits, but any contribution above 27.5% of taxable income or R350,000 per annum can only be paid into the “pension pot”.
  3. All contributions and growth accrued prior to March 1, 2023 (the vested pot) will need to be valued as of the date immediately prior to implementation, to allow for vesting. The conditions that were attached to these contributions will remain in place.
  4. The ‘savings pot’ will begin to be built up from March 1, 2023, at the same time as the ‘retirement pot’.
  5. All amounts withdrawn from the savings pot will be included in the member’s taxable income for that tax year and taxed at the relevant marginal rate.
  6. Only one withdrawal from the savings pot can be made per year, with a minimum of R2,000. All or part of the amount accumulated in the savings pot up to the authorized withdrawal date each year can be withdrawn.
  7. When reaching retirement age, the member can add the savings pot to the retirement pot to purchase an annuity or can withdraw the full amount of the savings pot in cash, which will be taxed according to the capital tables of retirement. The lump sum tables have more favorable tax rates (maximum of 36%) compared to the marginal rate tables which apply to annual pre-retirement savings jar withdrawals (maximum of 45%).
  8. Upon retirement, the full amount of the retirement pot must be used to purchase an annuity. The minimum amount that can be used to purchase an annuity is R165,000, amounts below R165,000 in the pension pot can be withdrawn as a lump sum.
  9. Before retirement, it is still possible for a member to withdraw funds from the vested kitty and, as before, this withdrawal will be taxed according to the retirement capital tables.
  10. Although no amount can be transferred out of the retirement pool, transfers can be made into it from other pools (acquisition, savings or retirement). No transfers can be made to the pool except from other pools. The retirement kitty and the savings kitty must be held in the same retirement fund (for example, you cannot hold the savings kitty in your former employer’s fund and the retirement kitty in your new employer’s fund).

Joon Chong, partner of Webber Wentzel.

Hear: John Anderson, Head of Investments, Products and Enablement at Alexforbes, on how the new two-pot pension system rules will impact you

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