LEGAL NOTE: Two Pot System

2022 Draft Revenues Laws Amendment Bill (Two Pot system)

On 29 July 2022, National Treasury released the 2022 Draft RLAB which contains key amendments on retirement reform to move towards a “two pot” retirement system.

Two pot system to enable the restructuring of retirement contributions by:

• allowing for limited withdrawals from the pre-retirement access pot; and

• creating a retirement savings pot where contributions will be preserved until retirement.

Summary of policy proposals:

• Contributions – all pension funds will be required to allocate contributions from 1 March 2023 to a new “Retirement pot” and a “Savings pot”. Up to 1/3 of contributions can flow to the savings pot, while the remainder should flow to the retirement pot.

• “Vested pot”– all contributions and growth that are accumulated before 1 March 2023 will have to be valued at the date immediately prior to implementation, to enable vesting rights (called the “vested pot” a term used to refer to all the different funds a person may hold on that date).

• The “savings pot” will then be accumulated from 1 March 2023. Members will also be able to withdraw from the “savings pot” once in a 12-month period, with a minimum withdrawal of R2000. All withdrawals from the “savings pot” will be included in the member’s taxable income.

• No immediate access to retirement savings on 01 Mar 2023 as previously indicated by NT.

• Pre-retirement withdrawals – if a member leaves employment, they will still be able to withdraw from the “vested pot”, which will be taxed through the applicable pre-retirement lump sum table.

• Retirement – amounts contributed to the “retirement pot” cannot be accessed before retirement. At retirement date, the total value must be paid in the form of an annuity. The current minimum amount for purchasing an annuity (R167 500) will apply to the retirement pot.

• Any funds available in the “savings pot” at retirement or death can either be withdrawn in full or transferred to the retirement pot.

• Change of tax residence – full withdrawals from the retirement, savings and vested pots can take place if an individual ceases to be a tax resident for a period of at least 3 years –with the appropriate tax treatment based on the facts and circumstances of the case.

• Transfers –individuals cannot transfer amounts out of the “retirement pot” but transfers can be made into the retirement pot from other pots, or from one retirement pot to another retirement pot. No transfers can be made into the “savings pot”, unless they are from another savings pot and subject to fund rules. It is also important to note that retirement pots and savings pots cannot be split between funds.