The two-pot retirement system is a few steps closer to becoming a reality in 2024

The aim of the retirement reform is to align the rules and benefits of the various retirement fund types.

The so-called two-pot system forms a part of this reform. Taking into account the changes that have been implemented in previous years, most of the new rule proposals should not come as a surprise.

A revised draft of the Revenue Laws Amendment Bill, 2023 was published on 9 June. The draft cleared up some of the remaining uncertainties and the process of interpretation and further guidance towards decree is under way. While these are proposals and not yet law, the fact remains that there will be a significant retirement landscape change on 1 March 2024.

A contentious issue in retirement reform has been the misalignment between the timing and level of access to funds per type of fund. Creating a level playing field has necessitated a give-and-take between the old and the new regime.

The provisions of the revised draft provide a solution to the inconsistency that retirement annuity fund members cannot access retirement savings prior to retirement. It also addresses the unintended consequence of individuals having to resign from their jobs in order to access their savings in a provident and pension fund during times of adversity. Under current legislation, preservation fund members can deplete their savings with one allowable withdrawal.

According to the revised draft, all members will be treated equal from 1 March 2024, but only in respect of the contributions to these savings vehicles as of that date.

Sanlam provides the following highlights of the proposals in the revised draft:

Phase one will be implemented from 1 March 2024.
Two pots have now become three components, i.e., the vested, savings and retirement component.
Members are not losing any existing rights. The retirement interest on 29 February 2024 will be allocated to the new vested component, but will keep its current vested or non-vested nature in terms of the current dispensation.
New contributions from 1 March 2024 will be split between the savings and retirement components.
Growth and returns stay in the component in which they are earned.
Seeding of the savings component has now been confirmed, and in essence, allows this component to be stocked or filled with money to enable immediate access on 1 March 2024, but only up to a limited value. The vested retirement interest of a member on the day before implementation can therefore ‘fund’ the savings pot up to a set maximum. The allowable seed capital is the lesser of 10% of the accumulated retirement interest in the vested component (29 February 2024) or R25 000.
The savings component is seeded from the vested component and not the retirement component – there is no choice here – but the member can, at any time after 1 March 2024, transfer the savings component to the retirement component.
The savings component can only be funded by seeding, 1/3 contributions and transfers from another savings component.
A member may make one withdrawal per tax year out of the savings component (only this pot) that is then taxed at the marginal rates of the member. These withdrawals are allowed per contract in a fund membership. The structure and nature of the membership or agreement as well as fund rules are going to be important here. The withdrawal value (savings withdrawal benefit) will form part of your annual taxable income and it currently looks like the withdrawal will be paid to the member after tax is paid over to SARS as per a tax directive.
Everything in the retirement component must be annuitised at retirement, except if the value falls below R165 000, in which case the member may choose to rather take a lump sum/fully commute. Application of the de minimis rule is across the annuitisation portions of both the vested and retirement components.
You cannot transfer only a portion or part of a component.
Deductions from a member’s pension interest in terms of a divorce court order is still allowable, but it seems to not be proportional from all components – only from the vested and retirement components. This might be something to watch in the commentary process and ultimate legislation.
The members of provident/provident preservation funds who were 55 or older on 1 March 2021, and are still members of the same fund, will have a choice about whether to partake in the new regime or not. If they choose not to, they will continue contributing to the vested component. It seems that this is going to be a once-off choice.

While defined benefit funds will be subject to the reform, legacy retirement annuity policies are exempt. There are also some changes, including rules around retrenchments, that will be considered in the next phase of the reform.

Speak to your financial adviser for more information on how the reforms will impact your retirement planning and savings.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.