“THE PROOF OF THE PUDDING IS IN THE EATING”.
The National Treasury and South African Revenue Service (SARS) has recently published for public comment the revised 2023 Draft Revenue Laws Amendment Bill and 2023 Draft Revenue Administration and Pension Laws Amendment Bill. These draft bills provide the necessary legislative amendments required to implement the first phase of the “two-pot” retirement system. Once passed into law these will have significant changes on contributors (retirement fund members) on national retirement fund book. As it stands these members will be able to access at least one-third of their retirement’s benefits, which accumulate from 1 March 2024, prior to resignation and or retirement.
WHAT DOES THE TWO-POTS SYSTEM ENTAIL?
The two-pot system entails that there are basically two pots of retirement savings, and these pots will be apportioned into two upon the implementation of the system. The first pot is the savings pot, which will be allocated contributions of one third of member’s contribution to all pension fund schemes, members will therefore be eligible to access these pension fund savings at any time prior to their retirement and without having to resign from their jobs. Whilst on the other hand the second pot is a retirement pot, to which two thirds of the member’s contribution will be allocated to. The contribution in the second pot will be preserved and can only be assessed at the retirement of such a member.
In its simplest form the two-pots system means South Africans will be able to access one-third of their retirement savings throughout their career, while two-thirds will only become accessible on retirement.
As it stands and if the National Treasury, Financial Sector Conduct Authority and SARS will have their ducks in a row the implementation period of the two pots system will be 01st March 2024.
WHAT WILL THE NEW TWO-POTS SYSTEM ENTAIL POST IMPLEMENTATION PERIOD?
From 1st March 2024 (or as and when the two-pots system is implemented), one third of any contribution a member makes towards his/her retirement fund will go into the savings pot and such member will be able to withdraw from such a savings pot prior to his or her retirement. The balance of the contribution (two third) will go into the member’s retirement pot, and such member can only be able to access such retirement savings on retirement.
WHAT WILL BE THE POSITION SHOULD THE MEMBER DIE?
The one third withdrawal saving is applicable to a member during his or her lifetime and prior his/her retirement, whilst the two third is available on retirement as a pension, however in the unfortunate circumstance where a member passed on prior to retirement, the retirement pot will be paid out to nominated beneficiaries or dependants as a lumpsum amount. In the case that member dies upon retirement but prior to the retirement benefits being paid to him or her, such sum may be paid out into his/her estate account, depending on specific facts of each case. One third saving will be payable to the beneficiaries or dependants and or the estate.
Withdrawals from the savings and retirement pots will be subjected to normal taxation whilst withdrawals from the retirement pot will be subject to the retirement tax table. Should a member withdraw money from the savings pot before he/she retire, it will be taxed at marginal rates (between 18% and 45%), However, a member who will withdraw at retirement will be taxed according to the retirement lump sum table (from 0% to 36%). The rule that the first R550 000 is tax free will still be applicable for member that will withdraw their lumpsum from their pension benefits on retirement.
THE ZAMBIAN EXPERIENCE
Across the territorial boarders South Africa, Zambia has recently implemented the system akin to the proposed South African two-pots system. On the 17th of April 2023, Zambian President Hakainde Hichilema signed into law the National Pension Scheme (Amendment) Authority Bill into law. This piece of Zambian legislation now allows Zambians to partially withdraw their pensions.
REQUIREMENT FOR WITHDRAWAL UNDER ZAMBIAN NATIONAL PENSION SCHEME (AMENDMENT) AUTHORITY ACT (“ZNPSA ACT”)
The ZNPSA Act only permits Zambians to withdraw portion of their pension fund saving before reaching retirement age of 55 years. To be eligible to withdraw pension fund savings, a member must have contributed to the fund for at least five years and or at least sixty contributions. The amount that can be withdrawn is capped at a limit of 20% of the total balance of such a member’s pension fund savings. The Zambian pension fund member can only make one partial withdrawal. In addition, and unlike the proposed South African’s saving’s pot, the Zambian pension fund contributor need not pay tax (the withdrawal is tax free), provided the withdrawal is made after completing the five years period. Finally, and according to media reports, the first day of the implementation of Zambian partial withdrawal saw an influx of pension fund members lining up for withdrawals.
It is noteworthy to observe that the introduction of the two-pots system is consistent with international social security systems trends and international financial markets evolutions. The introduction of the two-pots system will once implemented provides some measure of financial security to mostly “indebted” South Africans in that if used responsibly by contributors, it will afford contributors with the indulgence to cater for their essential benefits. Responsible utilization of the withdrawals will in my understanding relate to attending to essentials such as housing and education expenses. Finally, perhaps to avoid the Zambian experience of influx of pension fund withdrawers, the South Africa authorities may need to put measures in place such as choreographed withdrawals akin to those implemented by the South African Social Security Agency when administering and paying out the old age pension, child support grant and other social grants payouts.