It actually is complicated
One of the unintended consequences of all the new two-pot legislative rules is that members’ options when they withdraw from a pension or provident fund following their exit from employment have become fairly complicated. The natural result of this is that the options on withdrawal are difficult to explain and to understand. I don’t think this was the intention, but it has definitely been the outcome.
Persistent communication
In a recent EBnet article, I said that communication about the two-pot system has been prolific, determined, thoughtful, multi-channelled, multilingual and repeated frequently. I also said that many members were cherry-picking what they wanted to know about two-pot. I don’t think members currently really understand their withdrawal options on termination from employment. This is understandable, given the complexity around this topic. Now that most members understand the basic principles of the two-pot system, fund communication should focus on issues other than savings pot withdrawals.
Funds doing their best with the forms
A quick survey of various funds’ withdrawal forms and digital withdrawal options clearly demonstrates the complexity of withdrawal benefits. Funds and their administrators have done their best to try to make the options easier to understand, with varying degrees of success.
The options are the same for all types of withdrawals
This article only focuses on withdrawals of a member of a pension or provident fund who exits employment before retirement; retirement annuity funds and preservation funds work differently.
Treasury has previously said that it will reconsider options on retrenchment in the next phase, but, in the meantime, there is currently no difference between an exit based on retrenchment and other withdrawals, such as resignation or dismissal.
Quick reminder of the withdrawal benefit
Although not the focus of this article, before we consider the options a member has on withdrawal from a pension or provident fund, the following summary provides a quick visual reminder of how withdrawal benefits from pension and provident funds currently work:
On exiting employment, what options does a member have from a pension or provident fund?
Let’s start with the easy options:
Become a paid-up member in the same fund: a member can leave all the pots in the fund and become a paid-up member of that fund. No tax payable.
OR
Transfer to another fund: a member can transfer their whole pension or provident fund benefit to one other approved fund. This transfer could be to the new employer’s fund, a preservation fund or a retirement annuity fund. Current legislation does not allow a member to transfer their withdrawal benefit to more than one fund (i.e. to split the transfer). No tax payable.
So far, so good. Now let’s deal with if the member wants to take part of their withdrawal benefit in cash.
The member could decide to take the maximum cash allowed and then either:
(a) transfer the rest of their fund benefit to another approved fund; or
(b) leave the rest in the fund (i.e. become a paid-up member for that portion). This option allows a member to take all the cash in their vested pot and, if allowed[1], their savings pot. What then remains in their savings pot, if anything, and their whole retirement pot must be either (a) kept it in the fund – as a paid-up member, or (b) transferred to one other approved fund. The tax consequences of this option will be as follows:
Aaah, not so bad, I hear you say… but it gets tricky if the member only wants to take some (not all) of their vested and savings pots in cash when they leave employment. The options then available to the member can be summarised as follows:
The trickiness here relates to the vested pot. Once a member chooses to take a portion of their vested pot as a cash withdrawal benefit, the remainder – that is, the balance of the vested pot, the remaining portion of the savings pot (if any) and the total retirement pot – must be transferred to one other approved fund. (The member may not keep any remaining amount in the same fund (become paid-up).)
If the member takes the whole vested pot in cash, then the options for the remainder of the pots not paid/payable in cash are to keep them in the fund as a paid-up benefit or to transfer them to one other approved fund.
Let’s put it all together: options on withdrawal on termination of employment before retirement
(a) Leave everything in the fund as a paid-up benefit; or
(b) Transfer everything to one other approved fund; or
(c) Take some cash:
* The member can take the savings pot in cash if they have not already taken a savings withdrawal benefit in that tax year or if they have taken such a benefit in that tax year and the remaining balance in the savings pot is less than R2 000.
** If the member takes the whole vested pot in cash, the options for the remainder of the pots not paid in cash are to keep the pots in the fund as a paid-up benefit or to transfer the pots to one other approved fund. If the member chooses to take a part of the vested pot in cash, then the only option is to transfer the values in the other two pots to one other approved fund. The member may not keep the remainder in the fund as a paid-up benefit.
Additional taxation amounts
SARS may levy additional taxation amounts relating to arrear and penalty taxes over and above the tax referred to above if the member’s tax affairs are not in order. These additional amounts will be added to the tax payable on the withdrawal and deducted from the withdrawal benefit before payment.
Deductions
Any lawful deductions, as permitted under section 37D of the Pension Funds Act, in respect of housing loans or guarantees, damages to an employer or an existing or pending divorce or maintenance order, will be deducted proportionally from all three pots.
Emigration
Pension and provident funds
if a member emigrates, their employment is usually terminated. The member will then become entitled to a withdrawal benefit.
If the member ceases to be a South African tax resident for an uninterrupted period of at least three years, the member may take their whole benefit (including their retirement pot) as a cash withdrawal benefit (the three-year period). The three years start from when the member leaves South Africa. The member must use the RAV01 form to inform SARS on efiling that they have ceased to be a tax resident, otherwise the tax directive application will be declined when the member claims payment of the benefit. The administrator may require additional documentation.
Preservation fund members who have already taken their once-off withdrawal and members of retirement annuity funds
(a) If a member emigrates and the application for such emigration to be recognised for purposes of exchange control by the South African Reserve Bank (SARB) was received on or before 28 February 2021 and approved by the SARB on or before 28 February 2022, the member may take the whole fund benefit as a pre-retirement lump sum withdrawal benefit.
(b) If the application referred to in (a) above was received after 28 February 2021 or approved after 28 February 2022, the member may access the vested and savings pots but not the retirement pot before the expiry of the three year-period. After the expiry of the three year-period, the member can take the whole benefit as a pre-retirement withdrawal, or they can take the remainder if they have already taken the vested or savings pots.
The lump sum withdrawal benefit paid will be taxed in terms of the lump sum withdrawal tax table.
Expiry of work visa of a member of a pension fund, provident fund, retirement annuity fund and a member of a preservation fund who has taken their once-off withdrawal
The member is entitled to take their whole benefit as a lump sum when their visa or work permit expires. This lump sum benefit will be taxed in terms of the lump sum withdrawal tax table.
It really is not simple
The concepts above are not straightforward and explaining them to members is a herculean task. However, it is important we communicate clearly with members so that it is easier for them to understand their options and implications. Retirement benefit counselling and advice may play a role in this.
[1 ] When a member exits employment, they can take their savings pot in cash if they have not yet taken a savings withdrawal benefit in the same tax year or if they have taken such a benefit in that tax year and the remaining balance in the savings pot is less than R2 000.
