Two-pot pension: Updated system clears up some grey areas 

National Treasury and Sars’ publication of the revised 2023 Draft Revenue Laws Amendment Bill and 2023 Draft Revenue Administration and Pension Laws Amendment Bill on Friday for comment has cleared up some grey areas for the pension fund industry.

These draft bills provide the legislative amendments required to implement the first phase of the “two-pot” retirement system, as well as public comments received on the 2022 Draft Revenue Laws Amendment Bill published on 29 July 2022 and changes the word “pot” to “component” in the bills, although it will still be called the two-pot system.

The two-pot system for retirement savings will allow members of retirement funds to access one-third of their pension savings once a year in the event of an emergency, while preserving the other two-thirds for retirement as a better alternative to people resigning their jobs to access their pensions or provident funds.

Retirement reform executive at Old Mutual, Michelle Acton, says Old Mutual welcomes the revised bill as it is a significant step forward and brings much-needed clarity to several crucial grey areas, specifically concerning seeding and accessibility within the new regulatory framework. 

“The updated regulations will allow the industry to be in a better position to be ready by 1 March 2024, the date government expects the retirement funds to be prepared to implement the new laws.”

She says a considerable amount of effort is needed to ensure readiness, as entirely new and advanced automated systems must be developed to facilitate the efficient access of eligible portions of savings for fund members.

“Old Mutual fully supports these reforms and considers them to be pivotal, propelling us closer to achieving much better retirement outcomes for members.”  

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Clarification on seeding in two-pot pension system

The new draft legislation also provides certainty on seeding, defining the portion of current savings allowed to fund the accessible savings pot, with a maximum of 10%, capped at R25 000 of the member’s existing savings that will be used to seed the accessible pot.

Lorraine Mekwa, managing executive for client experience at Sanlam Corporate, says the update is great progress and gives a lot of information for the industry, although a lot more information is still needed for everyone in the industry to be ready.

“The implementation date puts pressure on the industry to make all the changes needed to bring the legislation to life, especially there is still some uncertainty.”

Natasha Huggett-Henchie, a principal consultant at NMG, warns that working South Africans should seek professional retirement benefit counselling before they make any major decisions around making withdrawals from their retirement funds.

“There is ‘a lot of confusion and concern’ in the marketplace about the impact of the new system, with many analysts saying it could have dire long-term consequences for fund members who already save too little for retirement.”

She says it is important that people are not tempted to treat their retirement funds as a transactional account but adds that NMG believes the move could actually benefit consumers in the long run, as it will prevent people from having to take out expensive short term loans.

“At the same time, being forced to preserve two-thirds of their funds over the long term (and not cashing in when they change employers) will improve retirement outcomes for most fund members.”

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Confirmation of start-date of two-pot pension system

Joon Chong, partner at Webber Wentzel, says the main changes in the system that is reflected in the new bills are the planned implementation date of 1 March 2024, and to allow retirement fund members on that date to access “seed capital” in the fund, calculated as 10% of the vested value on 29 February 2024, up to a maximum of R25 000, which would be subject to normal tax.

Other new changes include providing for equal treatment of defined benefit funds and to exempt legacy retirement annuity funds from the two-pot system.

Chong says in the second phase of implementing the two-pot system, the legislation will deal with the potential for withdrawals by members who are retrenched and have no other form of income. National Treasury wants to allow access to retirement savings only as a last resort.

National Treasury said in a statement on Friday that further complementary measures may also be considered in the second phase to ensure that the primary objectives for saving for retirement is not compromised and to protect the liquidity of such funds at all stages.

“Members of funds should be encouraged to only exercise the withdrawal option as a last resort and to try and preserve their savings for retirement for when they retire.” 

ALSO READ: Don’t cash in your pension funds when you resign

Public can comment before 15 July

Consumers can comment in writing on the revised 2023 Draft Revenue Laws Amendment Bill, the Draft Explanatory Memorandum on the Draft Revenue Laws Amendment Bill, 2023 Draft Revenue Administration and Pension Laws Amendment Bill and the Draft Memorandum on the objects of the Draft Revenue Administration and Pension Laws Amendment Bill.

Written comments can be sent to the National Treasury’s depository at 2023AnnexCProp@treasury.gov.za and Sars at acollins@sars.gov.za by close of business on 15 July 2023.

After receiving the comments, National Treasury and Sars will engage relevant stakeholders through public workshops to discuss the written comments on the draft bills.

The Standing Committee on Finance (SCoF) and the Select Committee on Finance (SeCoF) in Parliament are expected to make a similar call for public comment later in the year and convene public hearings before the bills’ formal introduction in Parliament.

When this has been done, a response document on the comments received will be presented at the parliamentary committee hearings, after which the bills will be revised, considering public comments and recommendations made during committee hearings before they are introduced formally in Parliament for its consideration.