National Treasury has set out which “legacy” retirement annuity (RA) funds it wants to exclude from the two-pot retirement system.
The latest two-pot proposals are contained in the revised 2023 Draft Revenue Laws Amendment Bill and the 2023 Draft Revenue Administration and Pension Laws Amendment Bill. Treasury and the South African Revenue Service (Sars) published the draft bills and accompanying draft explanatory memoranda on Friday.
Including all legacy RAs in the new regime would require the re-design of these policies, Treasury said in the explanatory memorandum to the 2023 Draft Revenue Laws Amendment Bill.
The draft legislation proposes inserting the following definition of a legacy RA fund into the Income Tax Act:
“Any policy that was entered into before 1 January 2022, is held with a retirement annuity fund and the terms of the policy provide that:
- a member of the policy must purchase the sum insured and share investment returns at portfolio level through reversionary bonuses, with no concept of a fund value; and
- on termination of the policy, the member will be subject to early termination charges and claw-back provisions.”
The proposed definition goes on to state that the exclusion will apply to legacy RAs with the following features:
- Pre-universal life policies and/or conventional policies with or without profits;
- Universal life policies with life and/or lump-sum disability cover; and
- Reversionary bonus or universal life policies as defined or referenced in the insurance legislation.
Note that the definition includes the cut-off date of 1 January 2022. This is because Treasury is proposing that the exemption applies only to legacy RAs bought before the formulation of the two-pot regime, which it regards as the publication of its two-pot discussion paper in December 2021.
To qualify for the exemption, a legacy fund will have to submit a signed declaration to the FSCA stating that it meets the above criteria. The FSCA may check whether the fund meets the exemption criteria.
Defined-benefit funds are included
The revised draft bill also provides for amendments to include defined-benefit (DB) funds in what Treasury called “an equitable manner”.
It proposes allowing DB funds to calculate the one-third contribution to the savings component based on one-third of a member’s pensionable service increase, and the two-thirds contribution to the retirement component based on two-thirds of the member’s pensionable service increase with effect from 1 March 2024.
Seed capital for DB funds will be calculated in the same way as for defined contribution funds “and can be accommodated with a past service adjustment”, Treasury said.
The condition for tax-free transfers between funds
As is currently the case, members will be allowed to make tax-free transfers between retirement funds when they resign or retire from their fund.
However, members must transfer all three components: savings, retirement, and vested. They cannot transfer only one component and leave the other components behind.
Subject to the abovementioned condition, the following inter-fund transfers will be permissible as tax-free transfers:
- From the transferor fund’s savings component to the transferee fund’s savings component;
- From the transferor fund’s savings component to the transferee fund’s retirement component;
- From the transferor fund’s vested component to the transferee fund’s vested component;
- From the transferor fund’s vested component to the transferee fund’s retirement component;
- From the transferor fund’s retirement component to the transferee fund’s retirement component.
Inter-fund fund transfers will be subject to the fund obtaining a tax directive from Sars.
Deductions against a member’s benefit
Section 37D of the Pension Funds Act authorises a retirement fund to deduct certain amounts from the benefits payable to a member. These deductions include:
- Any amount outstanding in respect of a housing loan granted to a member directly by the fund or by the employee in terms of the rules of the fund; and
- Damages caused to the employer by the member because of theft, fraud, dishonesty, or misconduct.
The draft legislation proposes that section 37D deductions be permitted against the vested component and the retirement component.
Taxation
The two-pot regime will adhere to the current principle of exempting contributions and the growth thereon from tax, while taxing withdrawn benefits. This is known as the EET system: “exempt, exempt, and taxed”.
As is currently the case, members will be entitled to a tax deduction on retirement fund contributions (their own or those contributed by their employer on their behalf) when the two-pot regime is implemented. The annual deduction is limited to the lesser of R350 000 or 27.5% of the higher of taxable income or remuneration.
Employer contributions made on behalf of employees will be treated as a taxable fringe benefit in the employee’s hands.
