By Vickie Lange, Head of Research: Best Practice & Academy at Alexander Forbes
National Treasury’s proposal to give limited access to retirement fund savings before retirement via the two-pot system has generated much interest across retirement fund members. The impact of this system will be felt in the long term as there is still much to be clarified before the system is implemented.
In the recent budget speech, Finance Minister Enoch Godongwana confirmed that draft legislation would be published later this year, setting out amendments to legislation that would enable a two-pot system allowing for short-term access to retirement savings.
It is, however, anticipated that further comment would need to take place around the details of the legislation before ultimately being promulgated. This type of change could take at least one to three years before being implemented.
The Finance Minister also mentioned that whilst the enabling legislation would be put in place, it would ultimately be left to the trustees of each retirement fund to decide how to apply the new legislation taking into account the specific circumstances of the fund.
What is the proposed two-pot system?
This system aims to find the right balance to help members save for retirement while allowing some flexibility for short-term emergencies. The ‘two-pot’ proposal splits new contributions from the proposed implementation date into two pots of money. Let’s say you are a member who has a pensionable salary of R10 000 a month and the contribution rate is 15% (R1 500 per month).
The first pot is for longer-term financial security: the retirement pot
R1 000 a month, less any fees and group insurance premiums will go into the retirement pot (two-thirds). It must be invested until retirement and used to buy a pension from a registered insurer unless you have saved less than the minimum required amount. This will improve retirement outcomes for most fund members.
The second pot is for short-term financial relief: the emergency savings pot
R500 a month, less any fees and group insurance premiums will go into the emergency pot (one-third). You may withdraw from the emergency pot once a year at most while working. If you withdraw all the savings in this pot before retirement, then you won’t have any money to withdraw from this pot at retirement.
Retirement fund savings are for retirement. It’s important to keep in mind that any savings are withdrawn from a retirement fund reduce your income at retirement. Even though you could withdraw a limited amount before retirement, it would be important to keep the money invested and only withdraw the savings for an emergency. Generally, it would also be advisable for you to have a discretionary emergency savings account outside the retirement fund.
Would the two-pot system apply to accumulated contributions before the implementation date of the two-pot system?
No, the two-pot system will apply only to new contributions from the implementation date, and it will take time to build up savings that can be withdrawn in the future. National Treasury has, however, asked for input on limited access to savings that have already accumulated in the funds, for example, 10% up to a maximum of R25 000.
Who will have vested rights to withdraw their accumulated retirement savings when they resign or get retrenched?
- Existing members: Yes, they have vested rights to withdraw. These are funds accumulated before the implementation date. Tax is payable on the withdrawal.
- New members: No, they don’t have vested rights to withdraw.
Will the two-pot system apply to all employees?
It will apply to:
- All employees who are currently members of a retirement fund (such as a pension fund, provident fund, retirement annuity fund, preservation fund, defined benefit fund or public sector fund)
- Any new members joining a fund.
Will this apply to preservation funds?
Yes. All money transferred into the preservation fund from the implementation date will be split between pot one and pot two. You can still withdraw some or all of your retirement savings from the vested portion. However, if you have already made a once-off withdrawal, then you can only access the benefit at retirement.
Will this apply to retirement annuity funds?
Yes. Retirement annuity funds will also be required to comply with future contributions split between pot one and pot two. Currently, you may not access these retirement savings before retirement (or death). Therefore there would be no change to access your savings in the fund before the implementation date.
How much tax applies to withdrawals?
The tax applicable is based on:
- How a member leaves the fund
- How much money they have withdrawn from the retirement fund over their lifetime.
Note: If you’ve used any of these allowances previously, even when retrenched, this will affect your future withdrawals and the tax you may have to pay. National Treasury is still considering the options related to the tax treatment. The current tax tables or tax treatment may change when the two-pot system is introduced.
National Treasury will confirm this information later this year once it has consulted the public. The answers provided are based on the current proposals by National Treasury and may change once the consultative process has been finalised.
Alexander Forbes continues to follow this closely and continues to provide input to assist in shaping the final legislation that will enable the new system. We shall apply our research, expertise and insight to ensure that the public interest is considered in decision-making.