In a bid to reform the retirement system, the government has put forward a proposal for a two-pot system, aimed at providing greater clarity and flexibility for retirement fund members. The details of the proposal were outlined in the recently released Revenue Laws Amendment Bill, which has generated significant interest and discussion among stakeholders.
The proposed two-pot system, which will apply to the Government Employees Pension Fund (GEPF) and other defined benefit funds, seeks to divide contributions into two separate pots: a savings pot and a retirement pot. Starting from March 1, 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. This feature aims to address the need for early access to retirement funds for emergencies. However, it is emphasized that the savings pot is intended to serve as a safety net rather than a primary source of income.
If an individual has multiple retirement funds, such as a company retirement fund and a personal retirement annuity, they will be permitted to make an annual withdrawal from each of these funds independently.
The proposal also includes provisions for accumulated retirement funds up until February 29, 2024. These 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.
Withdrawals from the savings pot will be taxed as part of the member’s taxable income, based on their marginal tax rate. It is advised that these funds should be reserved for genuine emergencies rather than day-to-day expenses.
The proposed two-pot system will apply to all defined benefit funds, including the GEPF. However, the calculation methods for the two pots will differ due to the unique nature of defined benefit funds. The allocation of contributions to the savings and retirement pots will be based on the member’s pensionable service.
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.
In the case of divorce, the ex-spouse will be entitled to a portion of the member’s pension interest, as determined by the divorce order. The pension interest comprises the balances in the vested, savings, and retirement pots.
When a member passes away, 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 annuitize the balance from the retirement pot.
The proposal aims to strike a balance between providing members with greater control over their retirement funds while ensuring long-term financial security. The government believes that the two-pot system will offer individuals more flexibility and options in managing their retirement savings.
The Revenue Laws Amendment Bill, including the two-pot system proposal, is currently open for public comment and further consultation with stakeholders. The government will carefully consider the feedback received before finalizing the legislation and implementing the reforms.