President Cyril Ramaphosa has signed into law the Revenue Laws Amendment Bill of 2023, which establishes a “two-pot” system that gives members of retirement funds access to retirement savings without having to resign or cash out entire pension funds.
The amendment law introduces a “two-pot” retirement system to address the concerns related to lack of preservation before retirement and lack of access to retirement funds by households in financial distress.
This retirement system comprises a savings and retirement component for contributions made after 1 September 2024, while historical retirement benefits will be housed in a vested component.
Individuals will have access to amounts in the savings component before retirement for times of financial distress, and the amounts in the retirement component are preserved until retirement.
The primary objective of the two-pot retirement system is to provide flexibility for fund members to access their retirement savings during emergencies, without necessitating resignation.
The reform introduced by the legislation strives to strike a balance between long-term security and immediate needs, recognising life’s unpredictability.
It permits fund members to access a portion of their savings during crises, such as those seen during the Covid-19 challenges.
“While we are continuing the task of growing our economy to create more opportunities for all South Africans and reduce the financial vulnerability affecting many individuals and households, the new retirement system offers protection and dignity to those who need it the most to overcome financial stress,” Ramaphosa said.
Old Mutual welcomes the signing of the bill, saying that it will provide significant long-term benefits.
“One of the most important points to communicate to members is when their money will be accessible. Even though the legislation goes live on 1 September, it doesn’t mean funds may be able to pay out on that date as there are several steps that need to be implemented first” the group said.
“This is primarily because the allocations to the Savings Pot can only happen from 1 September onwards”.
From 1 September, members will see the lower of 10% of the value of their retirement fund or R30,000 as of 31 August 2024 to be allocated to their savings pot under the new system. From that point on, two-thirds of any new savings will be reserved for retirement and cannot be accessed until then.
Members of Provident and Provident Preservation Funds who were 55 or older as at the 1 March 2021 in that same fund, will have the choice of whether to opt into the new system or stay in the current system.
Michelle Acton, Retirement Reform Executive, explained that payouts from this emergency pot cannot be made immediately.
“Seeding calculations can only be conducted after the end of August, using the values from that month. The legislation allows for seeding calculations soon after implementation, not necessarily on that date, as a result actual access for member will likely take place after 1 September” Acton said.
There is still a significant amount of work that Funds need to do to ensure they are ready for the new legislation, Old Mutual said.
This seeding calculation, which determines the initial amounts to be allocated to different “pots” or accounts based on existing retirement savings, relies on the current amount of savings in each member’s retirement account and their market value.
This process could take several working days to weeks, depending on the rules set by each retirement fund.
“The Two-Pot system is designed to be an emergency savings vehicle, giving you that initial boost to help build your emergency savings,” says Acton. “However, if you deplete it on day one, it ceases to serve as emergency savings.”
Old Mutual said that the signing of the Pension Fund Amendment Bill and the finalising and signing of the Revenue Second Amendment Bill are absolutely critical before the legislation is completely in place for implementation.
“It is also absolutely critical that SARS finalises the system requirements, as no savings pot payments can be made without a smooth tax deduction directive process,” it said.
The group also warned that members will need to have their tax affairs in order in order to apply for a Savings Pot withdrawal, and SARS may deduct any other outstanding tax before payment is made.
“All members will need to have a tax number to apply for a Savings Pot withdrawal.”
“Members will also need to take the time to understand this new system, and the importance of saving for retirement,” it said.
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