The much talked about two pot system for retirement savings hasn’t even come into being. And now government’s proposing a three-pot system (although they’re still calling it a two-pot system).

National Treasury and SARS have recently revised the draft bills and are awaiting feedback from industry bodies. But is it a recipe for disaster or the three-course dinner we’ve all been hoping for?

Read on for an in-depth discussion of the pros and cons of the pending changes to retirement planning in South Africa.

And now there are three
  • The vested pot (amounts accumulated before 29 February 2024)

  • The savings pot (the 1/3 of contributions that is accessible to members)

  • The retirement pot (the 2/3 of contributions that must be preserved until retirement).

The main pros and cons

Advocates for change regard the introduction of an accessible savings pot as good for those facing a financial crisis (such as that created by the Covid pandemic). This savings pot should assist in preventing people from resorting to debt to cover their expenses. The changes will also stop people from resigning to access all their retirement funds.

Those against the change highlight that most South Africans can’t afford to retire anyway – and giving them access to a part of their retirement funds will exacerbate the current dilemma.

According to a recent survey by Just SA, only 11% of South Africans over 50 feel “really confident” that their savings will last if they live to 100. For 57% of respondents, their retirement plan is to rely on their children or grandchildren.

The three pots – what you need to know

1. Lifting the lid on the vested pot

All your retirement savings accumulated before 29 February 2024 will remain untouched, although you can have 10% of your funds, up to a maximum of R25 000, transferred to your savings pot. This means you won’t have to wait for the savings pot balance to grow. But beware: any transfers to the savings pot are taxed at your marginal tax rate.

Once the new regulations are in effect, members will no longer be able contribute to their vested pot. With one exception: Provident fund members who were 55 years or older on 1 March 2021 will be able to continue making contributions to their vested component. They will also have the option of using the new system and having their contributions split between savings and retirement pots.

2. Lifting the lid on the savings pot

Members must contribute 1/3 of their retirement contributions to this pot and can make a withdrawal once a year. The minimum withdrawal amount is R2 000 but there’s no maximum amount. Any withdrawals will be treated as income and taxed at your marginal tax rate.

3. Lifting the lid on the retirement pot

Members must contribute 2/3 of their retirement contributions to this pot which must be preserved until the normal retirement age as specified by the fund’s rules.

Members may withdraw from the retirement pot should they emigrate from South Africa and cease to be tax residents, but as usual, they will need to wait for three years until they can access their funds.

National Treasury has said they will also consider withdrawals from the retirement pot for a retrenched member with no other income source.

What happens on retirement?

When members reach retirement age, they can add the savings pot to the retirement pot to purchase an annuity or withdraw the total amount in the savings pot as cash. Cash withdrawals will be taxed according to the retirement lump sum tables. The lump sum tables have more friendly tax rates (maximum of 36%) than the marginal rate table that apply to annual withdrawals pre-retirement from the savings pot (maximum of 45%).

On retirement, the total amount in the retirement pot must be used to buy an annuity. The minimum amount that can be used to buy an annuity is R165 000: lesser amounts in the retirement pot can be withdrawn as a lump sum.

More from the taxman
  • Transfers from the savings and vested pots into the retirement pot will be tax-free.

  • Contributions to retirement funds will continue to be tax deductible, and there will be no tax on the growth within the fund.

  • The limits of the tax deductions (27.5% of annual income with a cap of R 350 000) will remain the same. Contributions over these thresholds can flow only into the retirement pot. Employer contributions will still be treated as taxable fringe benefits.

What about defined benefit funds and legacy RA’s?
  • The revised bill suggests unbiased treatment for defined benefit funds, which calculate benefits based on a prescribed formula rather than individual contributions. Defined benefit funds will be able to calculate how much goes into each pot on the members’ behalf.

  • The revised bill proposes exempting legacy retirement annuity fund policies from the new system.

Is it really possible?

The new legislation will require funds to change their rules, train staff, educate members and introduce complicated systems.

Although industry bodies have expressed concern that there won’t be enough time to implement the changes, a spokesperson from Sanlam said that the legislation will likely go through in 2024 as it is an election year.

Another concern is that the changes may hurt funds if too many members transfer funds from their vested to their savings pot and make withdrawals (despite the tax implications). There’s concern that the accessibility of investment opportunities may lead to impulsive purchases rather than genuine necessity.

We recommend discussing the implications of the new rules on your retirement planning with us. There are many factors to consider, including tax efficiency, asset allocation, and preservation options.

Disclaimer – *The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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