No two-pot retirement system withdrawals already on 1 September

Although many of the six million who are members of retirement funds are looking forward to dipping into a portion of their retirement savings by 1 September this year when the Two-Pot Retirement System comes into operation, they will not be able to make withdrawals on 1 September already.

Deputy commissioner of the Financial Sector Conduct Authority, Astrid Luden, said in an answer to a question at a FSCA conference last week “What we have to manage is the public’s understanding that nobody will be able to pay out on 1 September”.

She agreed with the person from the industry who said, in response to a call that retirement funds must do more to increase their members’ financial literacy, that the FSCA and other government agencies, such as Sars, must work with the industry.

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Members expect to be paid out on Sunday 1 September

The person pointed out that members of retirement funds expect to be paid out on 1 September, which she also pointed out falls on a Sunday this year.

Ludin said that the FSCA invited the industry to submit rule changes to the FSCA already so that their feedback can be received upfront.

“We know you can only submit your rule changes by 1 September. We have three months. We must be clear about how this will be rolled out. Things will go wrong and we must manage expectations on the outside.”

The starting date of 1 September 2024 was confirmed as the implementation date for the two-pot retirement system in the Draft Revenue Laws Second Amendment Bill released by National Treasury released to make technical corrections to the Draft Revenue Laws Second Amendment Bill on the same day as the Budget 2024 speech.

Managers of retirement funds have until the end of March to comment on the Bill, which is largely aimed at clarifying the existing language and simplify the directives system for administrators as well as Sars to allow for an efficient implementation of the ‘two-pot’ retirement reform.

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Retirement fund members will pay tax on withdrawals

Another important aspect for consumers who want to withdraw funds from their retirement savings is that they will pay tax on their withdrawals. According to the 2024 National Treasury Budget Review, contributions to retirement funds will remain tax deductible and tax-free.

Finance minister, Enoch Godongwana, reassured retirement fund members that savings accumulated up to the date of implementation will not be affected, except for the initial seed capital amount.

“This amount will be the lower of 10% of the fund value on 31 August 2024 or R30 000 and will be transferred from accumulated retirement savings to the savings component to assist fund members who may prefer an immediate withdrawal due to a financial emergency.”

He said this seeding will be a once-off event. If members choose not to use it, it will still be available in the future. However, members who choose to do pre-retirement withdrawals from the savings component will pay tax at marginal rates as they do for all other income. When taxable income is lower, taxpayers will pay tax at lower rates.

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Only one withdrawal per year will be allowed

“Only one withdrawal may take place in a tax year and the minimum withdrawal amount is R2 000. The optimal option is still to preserve retirement savings as long as possible, as the amounts grow at compound rates and can attract lower tax rates,” National Treasury said.

“Amounts left in the savings component on retirement can be withdrawn and will be taxed according to the retirement lump sum table, which includes a tax-free lump sum of R550 000.”

All retirement funds that will be affected by the two-pot system must now amend their fund rules, which must be submitted to and approved by the FSCA.

Joon Chong, partner and Nicolette van Vuuren, senior associate at law firm Webber Wentzel, say some of the proposed changes in the Bill signify positive adjustments to the existing system.

“Firstly, it acknowledges and incorporates the new implementation date of 1 September 2024, providing clarity and alignment with the extended timeline advocated by stakeholders.

“Additionally, the bill eliminates the necessity for a tax directive when transferring the seeding amount from the vested to the savings components contemplated in the two-pot system.”

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Proposed amendments to definitions

They say the proposed amendments to the definitions of the three components exclude maintenance awards. This adjustment ensures consistency with existing tax provisions regarding the tax treatment of maintenance awards under section 7(11) of the Income Tax Act 58 of 1962.

The Bill also addresses intra-fund transfers and associated tax directives by proposing that the reallocations of amounts between the three components are not treated as transfers for which tax directives are required. Consequently, the requirement to obtain a directive for reallocations between the three components has been withdrawn in the Second Amendment Bill.

However, Chong and Van Vuuren say while these proposed changes are a step in the right direction to give effect to the two-pot system, the lead time provided still falls short of that which industry stakeholders advocate to overcome the practical challenges associated with the new system, including how it will be implemented for defined benefit funds (DB funds).

“The implementation of the two-pot system for DB funds must be carefully undertaken to ensure fairness to all members of each DB fund. Any necessary engagements with the FSCA by DB fund administrators will also require additional lead time from the promulgation date to the implementation date which the Second Amendment Bill does not provide,” they warn.