National Treasury has proposed amending the draft two-pot retirement legislation to clear up a number of grey areas identified by stakeholders.
The proposed changes were announced on Tuesday, when Treasury addressed the National Assembly’s Standing Committee on Finance on comments on the 2022 Draft Revenue Laws Amendment Bill, which amends the Income Tax Act to create the two-pot system.
Read: Treasury agrees to three of Cosatu’s responses to the proposed two-pot system
Read: New deadline for two-pot retirement system is still a big ask, says Asisa
Revisions that will affect the savings pot
The legislation will be amended to clarify that fund members will have to allocate at least one-third of their contributions to the savings pot. They will not have the flexibility to contribute less to this pot.
The draft bill allows fund members to make one withdrawal from their savings pot in a 12-month period. The bill will be amended to clarify that this is a rolling 12 months (not a tax year, a financial year, or a calendar year).
The legislation will be amended to make it clear that the minimum withdrawal of R2 000 from the savings pot is a gross amount, not net of tax or fees.
The draft bill will be amended so that members who leave their fund and have less than R2 000 in their savings pot will be able to commute the amount, or the amount will automatically be transferred to their retirement pot.
The bill will be amended so that members who emigrate will not be subject to a waiting period of three years before they can withdraw their savings from the savings pot. However, these members can only make one withdrawal every 12 months, so if a member who emigrates has already made a withdrawal, he or she will have to wait until the 12 months have expired.
The bill will be amended so that members and beneficiaries can receive an annuity, not only a lump sum, from their savings pot at retirement or on death. Members will also be given the option at retirement of transferring any balance in their savings pot into the retirement pot.
The draft bill states that withdrawals from the savings pot will be taxed at a member’s marginal rate of tax. Treasury rejected proposals for withdrawals to be tax-free, or taxed according to the pre-retirement withdrawals tax table, or taxed at a flat rate.
Defined-benefit funds
There are concerns that the draft legislation does not provide sufficient detail on how defined-benefit (DB) funds, such as the Government Employees Pension Fund, will be able to function in the two-pot system.
Treasury said it will consult with stakeholders and DB funds to consider how the legislation can accommodate DB funds.
“Protective mechanisms will be explored, including increasing future contributions if a member withdraws funds before retirement. The outcome of the consultative process will then inform any required legislative amendments.”
Options for provident fund members
Treasury said members of provident funds who were 55 or older on 1 March 2021 will have the option of:
- Continuing to contribute to their vested pot, in which case, 100% of the contribution will be allocated to the vested pot. The proviso for this option is that the member remains in the fund to which he or she belonged before 1 March 2021.
- Participating in the two-pot regime, in which case one-third of their contributions will go the savings pot and two-thirds to the retirement pot. Members who join the two-pot system will not be allowed to make further contributions to their vested pot.
Section 37D deductions
A number of commentators have asked for clarity on how the two-pot system will affect the deductions permitted in terms of section 37D of the Pension Funds Act. These include pension-backed housing loans, divorce order settlements, maintenance orders, and amounts due by a member to an employer.
Treasury said it was engaging with the FSCA on amendments to the entire Pension Funds Act, not only section 37D, to bring it into line with the two-pot legislation.
However, the “current policy thinking” was that deductions will be made from the retirement pot and the vested pot when a member leaves a fund or when divorce order settlements become payable.
Legacy RAs
Treasury was asked to exempt legacy retirement annuity products from the two-pot system, as their inclusion would require a redesign of historically acquired insurance policies and their terms and conditions.
Treasury said it would consult with the FSCA and industry stakeholders so that it could better understand the complexities relating to these products before it decides whether, or how, to amend the legislation.
Annuitisation threshold
Treasury was asked to clarify whether the R165 000 threshold at which savings must be annuitized at retirement applied per pot or cumulatively. It said the R165 000 de minimis threshold applied cumulatively to the amounts in the retirement pot and the vested pot.
Tax treatment of excess contributions
In terms of the draft bill, retirement fund contributions that exceed the annual tax-deduction threshold must be credited to the retirement pot.
The Association for Savings and Investment South Africa (Asisa) said it would be impossible to administer this provision, because to do so, a member’s taxable income will have to be known when the contributions are received, to enable a proper division between the savings pot and the retirement pot. The administrator of a particular fund will not know whether a member has contributed more than the maximum, because the member could belong to another fund or other funds.
Treasury has accepted Asisa’s point that the provision is not workable. However, it is unclear how it is going to amend it.
Cost deductions
Commentators said the draft bill seems to state explicitly that retirement funds must deduct costs from contributions, whereas funds currently deduct costs from contributions and fund values. This raised the issue of how funds that receive transfers but not contributions would deduct their costs.
Treasury was also asked to amend the legislation to clarify the nature and scope of costs that can be deducted from contributions or fund values, and that certainty be provided that these costs do not include subsequent transaction and administration fees.
Treasury told the committee it accepted that these points need to be clarified, but it did not provide any details of how they would be.
Investment strategy
Commentators asked for clarity on whether retirement funds should apply the same investment strategy to each pot and whether compliance with regulation 28 of the Pension Funds Act would apply on a per pot basis or across all pots. Treasury said the FSCA would provide clarity on these issues, because it would not be inappropriate to address them by amending the Income Tax Act.
