On Friday July 29, National Treasury released its annual set of draft legislative changes to South Africa’s tax acts. Significantly, they contain Treasury’s proposals for its so-called “Two-Pot” retirement fund system, first raised in finance minister Enoch Godongwana’s Budget speech in February.
Under the proposed “Two-Pot” system, your retirement savings will be divided into two “pots”. The “savings pot” (one-third of your savings) will be accessible for emergencies, but the second “retirement pot” (the remaining two-thirds) will be available only at retirement.
This means that you will no longer have access to or be able to cash in your entire retirement savings each time you change jobs.
Albertus Marais, director at tax consultancy AJM, says this is a further effort by the government to ensure that fewer people are dependent on the state to fund their retirement.
“Ultimately, the need to encourage retirement and ensure that individuals, when retiring, have access to some financial means is essential to the government, as it will, by default, become burdened by looking after its citizenry financially where those retirement savings are not in place,” Marais says.
“Government has, in recent years, tried to discourage early withdrawals by introducing higher tax rates for premature savings withdrawals. SARS and the retirement savings industry’s statistics indicate, however, that this has done little to dissuade South Africans from accessing savings early.”
Marais says the “Two-Pot” system presents a pragmatic approach. “It encourages retirement savings yet addresses certain realities such as that, in a challenging financial environment, some relief to individuals desperately needing it in times of emergency is necessary,” he says.
Marais points out that there are currently five types of retirement funds in South Africa: pension funds, retirement annuity funds, provident funds, pension preservation funds and provident preservation funds.
He says the need was identified in 2012 for the treatment of these funds to be aligned.
“Previously, savings in one type of fund could be accessed, for example, only when someone retired, while in others, access was available when a person became unemployed. This has led to undesirable consequences. Often, individuals are left financially desolate despite having significant retirement savings that are not accessible. In other cases, people would resign only to be able to access retirement savings required in the short term, even though this is detrimental over the long term.
“To a large extent, the treatment of these funds has now been aligned. That being so, due to the Covid-19 pandemic, it became apparent that, in some instances, limited access to retirement funds should be made available. However, this should not apply to all savings.
“Many South Africans have suffered significantly financially due to losing employment during the Covid-19 pandemic with no savings available other than from retirement funds. In such financial emergencies, it does not make sense for those funds not to be made available to individuals who may be left desolate now, with significant retirement savings available only in years to come, which is impractical. On the other hand, making all funds available to individuals prone to spend those savings prematurely, where it would be required later, is also not desirable,” Marais says.
The “savings pot” portion of your retirement savings is proposed to come into effect on March 1, 2023. Another draft rule is that you will be able to access your savings pot only once a year and the minimum withdrawal will be R2 000.
Treasury also proposes that you will only be taxed at your marginal tax rate on these withdrawals, unlike presently, where tax rates are higher if you withdraw your savings before retirement age.
The draft rules are open for public comment and input. Interested parties have until August 29 to submit comments to Treasury.