South African government proposes ‘Two-Pot System’ for retirement funds

In a bid to reform the retirement system, the South African government has put forward a proposal for a two-pot system, aimed at providing greater clarity and flexibility for retirement fund members, which were outlined in the recently released Revenue Laws Amendment Bill. The new system threatens to create more challenges for expatriates seeking to withdraw their retirement funds from South Africa.

The proposed two-pot system, which will apply to defined benefit funds, seeks to divide contributions into two separate pots: a ‘savings pot’ and a ‘retirement pot’. Starting from 1 March 2024, one-third of contributions will be allocated to the savings pot, while the remaining two-thirds will be directed to the retirement pot.

Members will have the option to make one taxable withdrawal per year from the savings pot, provided the balance has reached a minimum threshold of R2,000. If an individual has multiple retirement funds, they will be permitted to make an annual withdrawal from each of the funds independently. Withdrawals from the savings pot will be taxed as part of the member’s taxable income, based on their marginal tax rate.

The proposal also includes provisions for accumulated retirement funds up until 29 February 2024. These existing funds will be kept in a separate ‘vested pot’ and will not be subject to compulsory preservation when changing jobs. However, access to the vested pot will only be allowed upon retirement or resignation.

To address the need for immediate access to funds, the government has recommended allowing members to transfer a portion of their vested pot as ‘seed capital’ into the savings pot. The seeding capital amount will be set at 10% of the fund balance, with a maximum limit of R25,000.

Upon resignation, members will be entitled to their full actuarial interest, which includes the vested pot and the savings pot balances. The retirement pot will be preserved and only accessible upon retirement or in the event of death. The treatment of the retirement pot on retrenchment is still under consideration.

When a member dies, the benefits paid out will be based on the balances of the three pots, taking into account any service adjustments already made. There will be no requirement to annuitise the balance from the retirement pot.

The Revenue Laws Amendment Bill, including the two-pot system proposal, is currently open for public comment and further consultation with stakeholders. If introduced in March 2024 as currently proposed, it could create further challenges for expatriates seeking to withdraw their retirement funds from South Africa in addition to the three-year lock-in rule introduced in 2021.

To enable the remittance of encashed retirement funds, expats are required to obtain a Notice of Non-resident Status from the South African Revenue Service (SARS) and adhere to the Approval International Transfer under the Tax Compliance Status System. The relevant tax table to be applied to the tax calculation is determined by the type of encashment.

It is currently unclear whether the proposed two-pot system will require the categorisation of each of the pots to be taxed separately according to their differing values. Expats may therefore need to assess the distinct tax implications for each of their savings, retirement and vested components once they have ceased to be tax resident.

Contact Ralph Wichtmann
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