Following the 2023 Budget Speech, National Treasury in collaboration with SARS have released revised draft legislation (the draft) for the implementation of the “two-pot” retirement system. The proposed changes incorporate a change in terminology of the word “pot” to “component”, as well as the necessary amendments required for the first phase of implementation.
It is anticipated that from 1 March 2024 there will be three components (vested, savings and retirement component) of your retirement fund investment. The draft legislation is quite complex and detailed; however, we have summarised some of the main points hereunder:
Your available fund credit, plus investment returns as at 29 February 2024 will be allocated to this component.
Withdrawals are permitted in the event of retirement, dismissal, resignation or retrenchment. Funds in the vested component can be withdrawn as a cash lump sum or paid as an annuity.
Withdrawals paid in cash will be taxed according to the withdrawal lump sum tax tables (0% - 36%).
Contributions to this component will not be permitted except for provident fund members who were 55 or older on 1 March 2021.
From 1 March 2024, one third (1/3) of total contributions will be allocated to your savings component.
One withdrawal will be allowed in each tax year of assessment, subject to a minimum withdrawal amount of R2 000. At this point the draft does not specify a maximum withdrawal amount.
Single withdrawals (before retirement) from this component will be taxed at marginal rates (18% - 45% as part of the member’s income bracket).
Withdrawals from the savings component at retirement can be paid in cash and will be taxed according to the withdrawal lump sum tax tables (0% - 36%).
Your savings component will include your seed capital.
Seed capital is 10% (max of R25 000) of your fund credit in the vested component which will be allocated to the savings component.
A once-off withdrawal from the savings component on implementation date which means that you can immediately access a portion of your available fund credit in your savings component.
The maximum allowable withdrawal amount is R25 000.
Seed capital withdrawals are taxed at marginal rates (18% - 45% as part of the member’s income bracket).
From 1 March 2024, two thirds (2/3) of contributions will be allocated to the retirement component.
Withdrawal from this component is only allowed at retirement.
At retirement, withdrawals will be paid as an annuity (income), however a lump sum cash withdrawal is allowed if the total value in this component is below the statutory minimum (proposed minimum is R165 000).
Lump sum cash withdrawals are taxed according to the retirement lump sum tax tables (0% - 36%). Annuity (income) withdrawals are subject to PAYE and taxed at marginal rates (18% - 45% as part of the member’s income bracket).
Withdrawals from the retirement component for members who are retrenched and have no other source of income will be addressed in the second phase of implementation.
Funds can be transferred tax free within the same Fund, from the vested to the retirement component, or from the savings component to the retirement component.
A member cannot transfer their funds from the retirement component to the savings or vested component and cannot transfer funds from the vested to the savings component.
In general, transfers from one Fund to another is possible if a member retires or resigns and joins a new Fund.
A member may transfer their funds tax free from all components to a new Fund, however all three components must be transferred to the same Fund.
Members who emigrate from South Africa and cease to be a tax resident, may withdraw their retirement component and vested component as a lump sum, subject to the three-year rule that currently applies to members of retirement annuity and preservation funds. The draft is unclear whether these members will be able to access their savings component in the same way as other members over the three-year period.
Provident fund members who were 55 or older on 1 March 2021
The draft provides that provident fund members who were 55 or older on 1 March 2021 and still a member of the same provident fund on 1 March 2024 have a choice to:
Continue contributions to their vested component only, therefore, they will not have a savings or retirement component; or
To contribute to the savings or retirement components, therefore, they will no longer be able to continue contributing to their vested component.
The public had until close of business on 15 July 2023 to comment on these proposals, thereafter National Treasury and SARS will engage with various stakeholders through workshops to discuss the comments.
It is important to note that should you withdraw from the savings component before retirement; you will have less money for retirement. In the media statement released, National Treasury provides that the withdrawal option before retirement should be a last resort and members of Funds ought to first try and preserve their savings for when they retire.
These changes have implications and will be complex to understand at first. Before making any withdrawal or retirement planning decisions, we recommend that you seek advice from GIB Financial Services.
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