Retirement funds can continue to use their approved calculation methods when seeding the savings components of provident and provident preservation fund members who opt into the two-pot retirement system.
This is one of the proposed “technical” amendments to the 2024 Draft Revenue Laws Amendment Bill that has been accepted by National Treasury.
But Treasury rejected a proposal relating to lump-sum withdrawals from preservation funds on the cessation of South African residency.
Chris Axelson, National Treasury’s acting head of tax and financial sector policy, emphasised yesterday that Treasury’s responses to stakeholders’ proposed amendments have yet to be finally approved.
Various proposed amendments by the Congress of South African Trade Unions will not be addressed in this round of amendments to the two-pot legislation.
Among other things, Cosatu is calling for:
- tax concessions for low-income members who withdraw money from their savings component;
- allowing members to transfer their accumulated (pre-two pot) savings to both their savings (accessible) component and their retirement (preservation) component; and
- permitting members to use their retirement savings as security for education loans – in the same way that the rules of some pension and provident funds permit their members to use their savings as collateral for home loans.
Treasury said these proposals will be considered at a later stage “through policy options which incorporate thorough public consultation and engagement”.
The Draft Revenue Laws Amendment Bill, which is being processed by the National Assembly’s Standing Committee on Finance, is designed to fix problems with the Revenue Laws Amendment Act of 2024. The Act established the two-pot system via amendments to the Income Tax Act.
The Revenue Laws Amendment Act was signed into law in June. Before that, Treasury, recognising there were problems with the legislation that had to be fixed, published the Draft Revenue Laws Amendment Bill in February.
Treasury published a second, revised version of the draft Bill in August.
Seeding date for members of who choose to opt in
The Association for Savings and Investment South Africa (ASISA) told the Standing Committee on Finance earlier this month that the retrospective nature of the amendments may create problems for members of provident and provident preservation funds.
Read: ASISA flags ‘problematic’ amendments to two-pot legislation
The latest version of the Amendment Bill states that where members of provident funds or provident preservation funds who were 55 or older on 1 March 2021 (what is referred to as T-Day) elect to participate in the two-pot system, the calculation of the seeding amount must be based on the value of the member’s vested component on 31 August 2024.
But in the February version of the Bill, the calculation must be based on the value of the member’s vested component on the last day of the month during which the election to opt in was made, ASISA said.
The rules of some funds base the calculation on the value of the member’s vested component on 31 August 2024, whereas others stipulate the last day of the month during which the election was made.
The FSCA has approved fund rules that provide for both.
ASISA proposed that funds should be given the option to select which approach they will follow. In other words, they should be permitted to retain the approach that has been incorporated into their approved rules and communicated to their members.
National Treasury told the Standing Committee yesterday that it accepted ASISA’s proposal.
Exclusion of provident preservation fund members
Another problem flagged by ASISA is the conditions that determine whether members of provident preservation funds who were aged 55 or older on T-Day are automatically excluded from the two-pot system.
The August version of the Bill states that provident preservation fund members must meet two conditions to be automatically excluded from the two-pot system: they were 55 years or older on T-Day and they have remained a member of the same provident preservation fund since then.
But the February version of the Bill and the Revenue Laws Amendment Act of 2024 could be interpreted to mean that the person did not have to remain in the provident preservation fund to which they belonged on 1 March 2021.
ASISA said different retirement funds drafted their rules according to their understanding of Treasury’s intentions, and the FSCA has approved these rules.
ASISA proposed that funds should be allowed to continue to follow the approach in their approved rules.
Treasury did not specifically address this proposal in its response document yesterday. It is expected that Treasury will do so in its final response document.
Tax residency and preservation funds
The Amendment Bill provides that members of pension preservation funds and provident preservation funds can make a cash lump-sum withdrawal if they have ceased to be a South African tax resident for at least three years.
ASISA said the Bill does not take into consideration that members are permitted to make one partial or full withdrawal before their minimum retirement age (as determined by the fund’s rules). The Bill should be amended to provide that the three-year waiting period should apply only where the member has already taken a once-off withdrawal.
Treasury rejected this proposal yesterday.
It said a non-resident member is allowed to make a once-off withdrawal during his or her membership of up to the full value in the member’s interest in the vested component in his or pension preservation or provident preservation fund, but only if the member has not previously accessed the value in the vested component for that reason during the membership in the preservation fund.
If the non-resident member previously accessed the value in the vested component in the pension preservation fund or provident preservation fund during membership, the balance can be accessed only after not being a South African resident for three uninterrupted years.
Lump-sum withdrawals below R165 000
At retirement, a member can take the entire retirement component as a cash lump sum if 100% of the amount in the member’s retirement component plus two-thirds of the amount in the member’s vested component is R165 000 or less.
ASISA said funds have drawn up different definitions in their rules of how this de minimis calculation should be performed, some of which could give rise to confusion. It proposed the inclusion of a clearer definition that would avoid misunderstanding and ensure the consistent application of the calculation by all fund administrators and the South African Revenue Service.
Treasury said the current wording in the legislation is adequate.
Proportional deduction of maintenance claims
ASISA called for the Amendment Bill to make it clear that maintenance order claims must be deducted proportionately across all three components, as is the case with other deductions permitted in terms of section 37D of the Pension Funds Act.
Treasury accepted this proposal. Furthermore, the draft legislation will be amended to incorporate deductions for interim maintenance awards.
R2 000 threshold for savings component withdrawals
The wording of the Bill permits members with less than R2 000 in their savings components to make a withdrawal only if they have already withdrawn during the same tax year. Consequently, members who did not take a savings withdrawal benefit during the tax year because they had less than R2 000 in their savings component will be unable to access their savings component when leaving their fund. This appeared to be an inadvertent error.
Treasury said the Bill will be amended to allow members who have less than R2 000 in their savings component to withdraw the full amount when leaving the fund.
Calculations at retirement are at fund level
The Revenue Laws Amendment Act and the Amendment Bill stipulate that retirement fund calculations must be performed at contract level, not fund level. A member can, for example, have a number of contracts in the same retirement annuity fund.
ASISA said it was unclear which approach should be followed at retirement: must the calculations be performed per contract within the fund or on the entire amount in the fund?
Treasury said calculations must be performed on a per fund basis on retirement from the fund. Some other values (for example, the seeding amount and the calculation of one-third lump sum in the vested component at retirement) are per contract.
Threshold for pre-55 withdrawals from RAs
A member of a retirement annuity fund can withdraw his or her benefit as a lump sum before the age of 55 if the total value of the member’s interest in the fund is less than R15 000.
It was noted that because there are now member interests in the retirement component, savings component, and vested component, it is unclear to what “member’s interest in the fund” refers.
Treasury said the Bill will be revised to clarify that the benefit can be taken as a lump sum if the combined value of the retirement component and the vested component is less than R15 000.
Direct annuitisation from the savings component
The Bill’s definition of the savings component allows a member at retirement to choose to take the remaining balance in the savings component as part of the retirement lump-sum benefit, which will be taxed according to the rates for retirement fund lump-sum benefits.
If the member elects not to make a cash withdrawal, the remaining balance will be added to the retirement component to purchase an annuity.
It was proposed that the Bill explicitly allow for direct annuitisation from the savings component at retirement.
Treasury accepted the proposal, saying the wording will be revised to match the wording of the “savings component” definition as it appeared in the February version of the Bill.
