Treasury have published their first draft of the Two Pot System, which they propose will come into effect on 1 March 2023, although by their own admission they believe that this date might be optimistic, and as is often the case with first drafts, changes will be made before this piece of legislation is implemented.
The first point to highlight however, is that what is being proposed is in fact a 3-pot system – with the two pots being two new pots, in addition to the system as it currently stands.
In short, all your existing retirement interests – that means your contributions to your retirement funds (Pension, Provident, RA) up until 28 February 2023, as well as all growth on these funds beyond 28 February 2023 will remain in what they refer to as the “VESTED POT.” In essence, drawing a line in the sand at this point.
This vested pot will continue to operate under the current legislation when it comes to events such as retirement, death, and withdrawal.
After 1 March 2023, however no more contributions will be made into the vested pot.
Contributions made from 1 March 2023
These will be made into two pots, namely a SAVINGS pot, and a RETIREMENT pot (this is where the term two pot comes from.)
One third of actual deductible contributions will go into this pot. It is important to understand what your actual tax-deductible amount is. By way of example, if you contribute R900 000, and you only qualify for a maximum deduction of R350 000, then only one third (R116 667) will be allocated to the Savings Pot. The balance of the R900 000 less the R116 667 will be allocated to the Retirement pot.
So, what is the difference between the two?
You can make withdrawals from your savings pot on an annual basis. These withdrawals are subject to the amount you have in the pot and have a minimum withdrawal of R2000. It is proposed that you could make one withdrawal every 12 months.
These withdrawal amounts will form part of taxable income and taxed at marginal tax rates.
At retirement age, or on death, the full amount will become available, and taxed according to the retirement fund tax tables
You will only have access to these funds at retirement or on death. Unlike the current system (or amounts in the savings pot), you will not be able to commute a lump sum from the retirement pot. You will have to use the total amount accumulated in the retirement pot (contributions and growth) to purchase an annuity and provide you with an income in retirement.
The consequence of this proposal is that contributions to the savings pot on a relative basis will be limited and capped (due to the limit or cap of 1/3 of the actual deductible contributions).
And at retirement, you will only be able to commute (take cash) from this savings pot, which will in many cases form a much smaller part of your total retirement capital that you can access, than is currently the case (1/3 of RAs and Pension Funds).
Consequently, that will mean a bigger retirement pot on which you are forced to purchase an annuity, which is taxed as income and could mean a bigger ongoing tax liability.
There is some provision for non-tax residents (after 3 years) to access all the retirement pots – subject to the applicable tax
Vested Pot -lumpsum according to withdrawal tax tables
Saving Pot – lumpsum as taxable income (marginal rate)
Retirement Pot – lumpsum according to withdrawal tax table
Disallowed Contributions (10C)
Currently, disallowed contributions have been allowed to be deducted, first against lumpsum commutations, then against the compulsory income.
Under the vested pot, the current rules will still apply as above (up to 1/3 commutation, at least 2/3 compulsory annuity income.
The Savings Pot – you will not be able to set off disallowed contributions against this amount, as the savings pot cannot provide you with a compulsory annuity (which is a requisite for the deduction). This means these amounts will be taxed against the retirement withdrawal tax table.
Therefore, you will only be able to set off the disallowed contributions against the compulsory income generated from the retirement pot (on which there is no lumpsum available).
Our thoughts from an implementation point of view, is that it is going to be very difficult to implement this new system by this proposed date. Retirement funds, as well as SARS, would have to build new systems to track the detail, train employees and educate members about the changes and all the implications.
Furthermore, we believe this complicated proposed system could hamper retirement savings in a country where we have a poor savings culture, especially in relation to retirement.
Whilst trying to provide a mechanism for members to access some of their retirement savings in times of need (via the savings pot) and preventing the ability to cash in pension and provident funds in full when changing jobs (via the retirement pot that doesn’t allow that), individuals who make larger contributions to their retirement funds from a tax and estate planning perspective, might have to rethink their strategies.
Industry at large will no doubt be submitting their comments to Treasury for consideration. If unsuccessful, we might need to rethink strategies for creating liquidity in a tax efficient manner from a retirement planning perspective.