Leanne van Wyk, Director,
ICTS Legal Services (Pty) Ltd
It is a risky undertaking to write an update on two-pot now (2 November), as it is in a state of flux. Let’s see if I am proved right or wrong when this edition of Pensions World is published.
Recent developments
Treasury has presented its updated proposals to the Standing Committee on Finance. The Minister of Finance, in the Medium-term Budget Policy Statement, was silent as regards two-pot. But Treasury released the next version of the Revenue Laws Amendment Bill (that contains the two-pot legislation).
The Revenue Laws Amendment Bill will now find its way, in November, to the Select Committee on Finance. It is at this stage that there could be some important decisions made, for example about whether to accept Treasury’s proposal to postpone the implementation of the two-pot system from 1 March 2024 to 1 March 2025. This proposal received mixed reactions.
Recently, Treasury stated in an industry meeting that the Revenue Laws Amendment Bill would only be gazetted (in its final form) in 2024. This fact, along with the fact that the industry cannot finalise administration system, communications or much else until the final legislation is seen, gives me more confidence to place my bet on the side of two-pot being postponed. To do anything else would cause mayhem and severe risk to funds and members.
It is worth noting that the implementation date of 1 March 2025 is included throughout the revised Revenue Laws Amendment Bill. However, that date is not yet a done deal (at time of writing).
The amendments to the Pension Funds Act, for example dealing with deductions, is in a different piece of legislation and timelines have not yet been set for the progression of this legislation. It is perhaps also useful to know that the Conduct of Financial Institutions Bill will not be promulgated this year.
Some of the changes to the two-pot system contained in the Bill
Let’s look at some of the changes to the Revenue Laws Amendment Bill and, thus, the two-pot system.
Seeding
Remember, seeding is the amount of the vested pot (everything built-up in the fund by a member up to 28 February 2025) that transfers into the savings pot on 1 March 2025 and that a member can immediately access in cash, without leaving employment or the fund.
The cap on the amount of seeding has changed from R25 000 to R30 000. The seeded amount is now:
10% of the vested pot on 28 February 2025, capped at R30 000.
The Bill clarifies that the seeding is a once-off event.
Treasury stated that it amended the cap as an inflationary adjustment (given when it was first proposed). In my view, this is a good indication that Treasury stood its ground on the cap and is not bowing to pressure. This bodes well for any future call to make this seeded amount anything other than a once-off event. This is important for the adequacy of the retirement funding system in South Africa as well as for confidence in Government’s intent and in the system.
For members of provident funds and preservation provident funds under 55 on 1 March 2021: the seeded amount will be come out of the annuitisation vested and non-vested parts of the vested pot proportionately.
For members of provident funds 55 and over on 1 March 2021 (and still members of the same provident fund): these members only have vested amounts in their vested pot, so is not necessary to deal, in legislation, with the above split of the seeded amount.
Older members: members of provident funds where were 55 and older on 1 March 2025 (and still members of the same provident fund)[1]
These members will now be able to OPT INTO the two-pot system as opposed to OPT OUT OF the two -pot system. So these older members will automatically be out of the two-pot system and can opt in.
This appears to be a once-off option, but the option does not need to be made by these older members on or before 1 March 2025. It could be made at any time. However, even if a decision is made to opt in after 1 March 2025, the seeded amount will always be calculated as at 1 March 2025 (thus requiring administrators to maintain this amount in its records)
This decision requires communication from the fund about the consequences of their options and perhaps some financial advice to be obtained by such members.
Opting into the two-pot system means these members will have ongoing access to savings withdrawals from a savings pot. But they will lose the compulsory annuitisation vesting on ongoing contributions and investment return on that, meaning they must take more as an annuity on retirement.
Staying out of the two-pot system means these members will not have access to ongoing savings withdrawals from a savings pot. But they will continue to see their contributions vested from a compulsory annuitisation point of view (including investment return on that) meaning they can take more in cash on retirement.
Savings withdrawals from the savings pot
Savings withdrawals pre-retirement are still taxable at the member’s marginal rate. However, the Bill now contains provisions for the South African Revenue Service (SARS) to issue the fund’s administrator with a flat rate to tax the savings withdrawal. Any overs and unders would then, no doubt, be dealt with in the member’s tax return. The workings of this mechanism will still need to be expanded upon by SARS.
Intended exemptions from the two-pot system
The intention is to exempt the following types of funds and persons from the two-pot system:
- A “legacy retirement annuity policy’’(in a Retirement Annuity Fund) as defined in the Bill that has been approved for exemption by the Financial Sector Conduct Authority.
- A beneficiary fund.
- An unclaimed benefit fund.
- A ‘‘pensioner’’ as defined in section 1 of the Pension Funds Act.
Simplification of what happens on death of a member
The idea is to keep things much the same after implementation of the two-pot system as it is now. That is, that beneficiaries can opt to take their death benefit allocation as an annuity or as a cash lump sum.
- Savings pot: on the death of the member this pot is paid to a nominee or dependant of the deceased member or former member (as an annuity or lump sum depending on what they elect).
- Retirement pot: does not have to pay out as an annuity on death. Can pay out as a cash lump sum.
- Vested pot: existing rules apply, so it can pay out in a lump sum as cash or as annuity (as the beneficiary elects).
Section 37D deductions
- Deductions related to housing loans/ guarantees, maintenance orders, divorce orders and misconduct at the employer can now be made from all three pots, including the savings pot (previously deductions were only permissible from the retirement pot and vested pot).
- Deductions will be made proportionately across the savings pot, vested pot and retirement pot.
- When a non-member spouse elects to have their pension interest transferred to another fund, it is transferred pot to pot, or from the vested and savings pot to the retirement pot.
- Deductions are dealt with in a different Bill. The Bill including amendments to the Pension Funds Act will also go to the Select Committee on Finance but may follow a different path, from the Revenue Laws Amendment Bill, after that (as it is not a money Bill). Treasury has not provided any dates as to when this legislation would be gazetted or progressed through the legislative process. The definition of “pension interest” will be added to the Pension Funds Act with a view to ironing out the current problems with the definition of pension interest, which is the amount in the fund for a member that can be taken into account when assets are split on divorce. The definition has been interpreted on numerous occasions by our courts and caused many problems, complaints and litigation. The idea is to simplify the definition and try to remedy some of the problems caused by the current definition of pension interest.
Defined benefit funds or funds that have a defined benefit component
The Bill creates more flexibility for calculating the one-third/ two thirds split when contributions are paid into a defined benefit fund:
- In the case of funds with a defined benefit funding structure, the total value attributed to the savings and retirement pots on or after 1 March 2025 will be determined with reference to one-third (savings pot) or two-thirds (retirement pot) of the member’s ‘‘pensionable service’’ as contemplated in the rules of that fund on or after 1 March 2025; and
- A fund with a defined benefit structure that is unable to allocate contributions as above may allocate contributions utilising a reasonable method of allocation as approved by the Financial Sector Conduct Authority. This will require the FSCA to have oversight of the method chosen by the fund but at least allows for a different method to be used if the fund can’t use pensionable service as a proxy.
Decisions and finalisation
I am hoping that Parliament will make the decisions (and gazette the legislation) for the two-pot system soon so that we all gain clarity and can get on with the implementation.
[1] There is inconsistency in the wording of the Bill about including the requirement for such older members to still be members of the same provident fund, but I have assumed that this is a drafting issue and will be corrected.
