Second draft of two-pot proposals released

National Treasury published the second draft of the Revenue Laws Amendment Bill (RLAB) on 9 June 2023, containing the key proposals on retirement reform to move toward the “two-pot” retirement system.

Consequential amendments to the Pension Funds Act were also released in the draft Revenue Administration and Pension Laws Amendment Bill (RAPLAB).

Both the RLAB and RAPLAB are open for comments until 15 July 2023. Noteworthy additions/ clarifications from the first draft:

1. The naming convention shifted from “pots” to “components”. It is however still introduced as the “two-pot” system.

2. The implementation date is still proposed as 1 March 2024.

3. Seed capital to savings pot (starting balance): On 29 February 2024, 10% of the value of a member’s benefit in the fund, capped at R25 000. This is allocated from the vested pot “on or after 1 March 2024” – it therefore seems that it will be an automatic allocation, and not per choice.

4. Transfers from the savings pot or vested pot to the retirement pot in the same fund will be allowed at any time. It will be tax-free transfers, but tax directives will have to be applied for. The Draft Explanatory Memorandum specifically states that the ability to effect both inter and intra fund transfers will be subject to the fund obtaining a tax directive, although the draft wording in the RLAB does not support this.

5. Payments from the savings pot will be taxed at marginal rates, and tax directives will need to be applied for. In giving the directive, SARS will apply the tax table that is applicable to the savings withdrawal benefit, i.e. the progressive table (marginal rates).

6. Only provident fund members older than 55 on 1 March 2021, who are still members of the same provident fund, may elect to continue to contribute to the vested pot. This will apply until they retire or leave the fund they were a member of on 1 March 2021. They will therefore lose this right when they exit the provident fund they were a member of in 2021.

7. Withdrawal from the savings pot will be limited to once per year of assessment (therefore tax year). When a member resigns from employment, an additional withdrawal will be allowed if the amount in savings pot is less than R2 000. The R2 000 will be the value before any charges/transaction costs are deducted.

8. Defined benefit funds will have to calculate the one-third contribution to the savings pot based on one-third of the member’s pensionable service increase. The two-third contribution to the retirement pot will likewise be calculated based on two-thirds of the member’s pensionable service increase with effect from 1 March 2024. Seed capital will be calculated in the same manner and can be accommodated with a past service adjustment.

9. Legacy retirement annuity policies will be exempted from the two-pot retirement system (policies entered into before 1 January 2022).

10. Retrenchments will be considered in the second phase of implementation.

11. Upon the death of a member, beneficiaries will receive an annuity from the retirement pot. Beneficiaries may receive a lump sum from the savings pot or transfer it to the retirement pot.

12. De minimis will apply to the retirement pot plus compulsory annuitisation portion of the vested pot (de minimis is currently R165 000).

13. Section 37D deductions will be done proportionally from the different pots.

14. Proposed changes to the Pension Funds Act:

A savings pot withdrawal may be refused unless a fund is satisfied that the withdrawal will not compromise the fund’s ability to make section 37D deductions.

Housing loans

In line with regulation 28, it is proposed that the amount of a housing loan or housing loan guarantee be capped at 65% of a member’s benefit available (this includes all pots).

Conditions for providing housing loans or housing loan guarantees may be prescribed by the FSCA.

Employer damage claims

Changes are proposed to section 37D, including the provision that employer damage claims may be deducted when a member’s employment with an employer terminates (currently it says when a member ceases to be a member of the fund).

Compensation orders granted in terms of section 300 of the Criminal Procedure Act will be specifically included as a “judgment that has been obtained”.

If a member has a housing loan granted by their employer, or where there is a judgment in favour of the employer, a fund will only be permitted to allow the member to withdraw from the savings pot if the employer consents thereto, unless the value is sufficient to cover the judgment amount.

A fund will only be allowed to withhold a member’s benefit (in anticipation of a judgment) if a court has granted an order authorising it (therefore obtained an interdict to prevent payment of the benefit to the member).

Maintenance orders

Amounts payable as maintenance in terms of an interim maintenance order, may qualify as a deduction.

Maintenance must be paid by the fund as directed in the order, either as a lump sum in respect of arrear maintenance or in monthly instalments in respect of future maintenance orders (or annually in advance where fund is unable to make monthly payments).

A fund may not allow a member to withdraw from the savings pot where there is a maintenance order in place, unless it is satisfied that the withdrawal will not cause the amount remaining to be insufficient to comply with the order.

A fund may also refuse withdrawals from the savings pot where it is aware that an action to a maintenance order is pending.

Divorce orders

The portion allocated to the non-member spouse will accrue with fund return from the date of divorce.

A definition of “pension interest” is added, but it refers to the benefit a member would have been entitled to on resignation from employment (which seems to be an error, as it will then only include the savings pot and vested pot).

Pension interest is also introduced for paid-up members and pensioners, which indicates that the regulator’s aim is that for as long as the benefit is still held by the fund, the fund can make payment to the non-member spouse. The payment of pension interest will no longer be reliant on whether the member is still employed.

Member’s individual account

It is clarified in section 14B that when calculating a member’s individual account, section 37D deductions and withdrawals from the savings pot must also be taken into account (it currently refers to lawfully permitted credits or debits, in other words operational cost deductions permitted in terms of the rules).

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