A different kind of melting pot? Implementation of the two-pot retirement system pushed to 2024

A different kind of melting pot? Implementation of the two-pot retirement system pushed to 2024

• 23 March 2023
• Individuals Tax
• Cliffe Dekker Hofmeyr

During the 2022 legislative cycle, amendments were made to the ITA to introduce the somewhat groundbreaking two-pot retirement system. The two-pot retirement system was introduced pursuant to the initial publication of a discussion document by Government in December 2021.

The two primary concerns with the design of the retirement system, prior to the introduction of the two-pot retirement system were:

• the lack of preservation before retirement; and
• the issue that some households in financial distress have assets within their retirement funds that are not accessible even in the case of emergencies. This issue was highlighted in particular by the advent of the COVID-19 pandemic.

The Budget indicates that, following extensive public consultation during 2022, the first phase of legislative amendments to the retirement system, that is, to establish the two-pot retirement system, will take effect on 1 March 2024. The initial draft of the 2022 Revenue Laws Amendment Bill published in August 2022, had proposed that the two-pot retirement system would take effect from 1 March 2023. The Budget summarises some of the key tenets of the system, pursuant to its implementation as follows:

• Retirement fund contributions will remain deductible up to the limit of R350,000 per year or 27,5% of taxable income per year (whichever is lower), as is currently provided for in section 11F of the ITA.
• Permissible withdrawals from funds accrued before 1 March 2024 will be taxed according to the lump sum tables. In this regard, it is also noteworthy that the Budget proposes increases in the thresholds at which retirement fund lump sum benefits are attached. Whereas only the first R500,000 withdrawn is currently exempt, it is proposed that this be increased to R550,000 going forward. The 18%, 27% and 36% tax brackets of the retirement fund lump sum benefits table have also been amended, meaning that the tax paid on such withdrawals should now be lower, albeit that one must consider inflationary effects.
• Withdrawals from the “savings pot”, which is a new concept referring to the pot from which amounts can be withdrawn prior to retirement will be taxed at marginal rates. In other words, it will be taxed in accordance with the normal income tax brackets ranging between 18% and 45%.

As we have indicated in a previous Tax and Exchange Control Alert, the amendments proposed to implement the two-pot retirement system are quite complex and would require substantial amendments to the Income Tax Act. Therefore, it appears sensible that the implementation of the system has been delayed, although it serves an important purpose, namely, to enable pre-retirement access to a portion of one’s retirement assets, while preserving the remainder for retirement.

However, it also appears that the decision to postpone implementation might have been influenced by what was stated in the Budget regarding certain areas that require additional work. Specifically, the Budget notes that the following four areas require additional work:

1. A proposal for seed capital. It remains to be seen whether this would relate to proposed amendments to the so-called “vested pot”, being the value in the fund that exists prior to the two-pot retirement system coming into effect, according to the 2022 draft legislation.
2. Legislative mechanisms to include defined benefit funds in an equitable manner. In this regard, one should note that most modern retirement funds are defined contribution funds, where the amount available on retirement is dependent on one’s contributions. This is different from defined benefit funds, where the benefits are defined by the fund rules and benefits are generally guaranteed and are not dependent on the investment returns of the fund or on the level of member and employer contributions. As it has been proposed that the amount available in the “savings pot” for withdrawal prior to retirement is dependent on the amount of contributions made, it follows that the same principle cannot necessarily apply to defined benefit funds.
3. Legacy retirement annuity funds.
4. Withdrawals from the retirement portion if one is retrenched and has no alternative source of income. Within the context of the two-pot retirement system, this seems to refer to amounts that are intended to form part of the “retirement pot”, to use the phrase in the draft legislation.

The Budget indicates that the first three matters will be clarified in forthcoming draft legislation, whereas the final matter will be reviewed as part of a second phase of implementation.

Source: Cliffe Dekker Hofmeyr

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