PWM CLIENT COMMUNICATION AUGUST 2024

UPDATE: THE TWO-POT SYSTEM

By Carl Muller | PWM Legal Executive

INTRODUCTION

The “Two Pot” retirement system will come into operation on 1 September 2024. In this communication the latest developments on this topic are discussed.

THE CONCEPT OF THE “TWO POT SYSTEM”

The reference to the “Two Pot System” is a bit of a misnomer. Persons who are existing members of pension, provident or retirement annuity funds on 1 September 2024, will have three “pots” (components) going forward:

The Vested Component
The fund value in a pension, provident or retirement annuity fund on 31 August 2024, minus once- off seed capital allocated to the “Savings Component”, plus investment growth thereon.

The Savings Component
One third of contributions made to a pension, provident or retirement annuity fund from 1 September 2024 plus once-off seed capital allocated from the “Vested Component”, plus investment growth thereon.

The Retirement Component
Two thirds of contributions made to a pension, provident or retirement annuity fund from 1 September 2024 plus investment growth thereon.

It is thus only in the instance where you start contributing to a new pension or provident fund or a new retirement annuity policy/contract on or after 1 September 2024, where there will only be two components: a “Savings Component” and a “Retirement Component”.

If you are a member of a preservation fund on 31 August 2024, the full interest in such preservation fund will consist of a “Vested Component” as contributions to preservation funds are not allowed. The interest in a preservation fund only consists of transfers from a pension, provident or other preservation fund. An amount of “seeding capital” will however be allocated to the “Savings Component” in a preservation fund, as discussed below. If you transfer to a preservation fund from a pension or provident fund after implementation of the “Two Pot” system, such transfer will contain all three components.

THE “VESTED COMPONENT”

What will the “Vested Component” consist of?

  • The “Vested Component” will consist of your fund value in a pension, provident, retirement annuity or preservation fund on 31 August 2024, plus subsequent investment growth thereon.
  • An amount of “seeding capital” will however be allocated from the “Vested Component” to the “Savings Component” – see the discussion of the “Savings Component” below.

When will you be allowed to make a cash withdrawal from the “Vested Component” before retirement?

The current rules applicable to the withdrawal of investments in pension, provident, retirement annuity and preservation funds mostly remain unchanged as far as the “Vested Component” is concerned. If you have any questions in this regard, please contact your financial planner.

TAXATION ON WITHDRAWAL

If you make an allowable lump sum withdrawal from the “Vested Component” in a pension, provident, retirement annuity or preservation fund prior to retirement, the taxation thereof remains unchanged:

Taxable Lump Sum Rate of Tax
R0 – R27 500 0% of taxable lump sum
R27 501- R726 000 18% of taxable lump sum above R27 500
R726 001 – R1 089 000 R125 730 plus 27% of taxable lump sum Above R726 000Column 2 Value 3
R1 089 001 and above R223 740 plus 36% of taxable lump sum above R1 089 000

The application of the above tax table is cumulative over your lifetime and lump sums received previously from one or more pension, provident, retirement annuity or preservation fund as well as severance benefits paid by an employer may influence your tax liability.

How will the “Vested Component” be treated on retirement?

You will only be entitled to a maximum lump sum equal to one third of the value of the “Vested Component”, and the balance must be used to purchase an annuity (income). There are however exceptions to this rule:

  • If the cumulative value of two thirds of your “Vested Component” (excluding vested rights in respect of pre-1 March 2021 provident or provident preservation fund membership) plus the full value of your “Retirement Component” does not exceed R165 000, the full value of your “Vested Component” and “Retirement Component” may be taken as a lump sum; and
  • If you were a member of a provident or a provident preservation fund on 1 March 2021, there will be vested rights in the “Vested Component” in relation to the regime applicable to these funds before 1 March 2021, which will not be taken into account in the calculation discussed in the previous bullet. The portion of the “Vested Component” related to these vested rights may be taken as a lump sum on retirement.
TAXATION ON RETIREMENT

If you receive a lump sum from the “Vested Component” in a pension, provident, retirement annuity or preservation fund on retirement, it will be taxed as follows:

Taxable Lump Sum Rate of Tax
R0 – R550 000 0% of taxable lump sum
R550 001- R770 000 18% of taxable lump sum above R550 000
R770 001 – R1 155 000 R39 600 plus 27% of taxable lump sum Above R770 000
R1 155 001 and above R143 550 plus 36% of taxable lump sum above R1 155 000

Please note that the application of the above tax table is cumulative over your lifetime and certain lump sums received previously from one or more pension, provident, retirement annuity or preservation fund as well as severance benefits paid by an employer may influence your tax liability.

Amounts received as an annuity will be taxed as normal income according to your marginal tax rates.

THE “SAVINGS COMPONENT”

What will the “Savings Component” consist of?

  • One third of your contributions paid to a pension, provident or retirement annuity fund will be paid into the “Savings Component” from 1 September 2024.
  • In addition to this, once off “seed capital” from your “Vested Component” will be allocated to your “Savings Component” as follows: 10% of the value of your “Vested Component” on 31 August 2024, but limited to a maximum amount of R30 000. Where you have more than one contract or policy in a fund, this will apply to each contract or policy.

Example 1:
If the value of your “Vested Component” is R50 000 on 31 August 2024, R5 000 thereof will be allocated to your “Savings Component”.

Example 2:
If the value of your “Vested Component” is R1 000 000 on 31 August 2024, R30 000 thereof will be allocated to your “Savings Component”.

Example 3:
You have two contracts (policies) in a retirement annuity fund. The value of the “Vested Component” of Policy A is R800 000 and of Policy B is R100 000 on 31 August 2024. In respect of Policy A, R30 000 will be allocated to your “Savings Component”, and in respect of Policy B, R10 000 will be allocated to your “Savings Component”.

When will you be allowed to withdraw from the “Savings Component” before retirement?

  •  You will be allowed to make one withdrawal per tax year (from 1 March of a year to 28/29 February of the next year) from your “Savings Component” from 1 September 2024.
  • The minimum allowable annual withdrawal amount will be R2 000 and there will be no maximum amount limit (other than the total value of your “Savings Component”).
  • The ability to make the above withdrawals from the “Savings Component” will be applied per fund (if you are a member of more than one fund, an annual withdrawal will be allowed from each fund) and per contract (if you have more than one contract or policy in a retirement annuity fund or a preservation fund, an annual withdrawal will be allowed from each contract or policy).
  • If you exit a pension, provident, retirement annuity or preservation fund before retirement, and you have already made use of your annual withdrawal, you will be allowed an additional withdrawal if the value in your “Savings Component” of the fund that you are exiting from is less than R2 000.
TAXATION ON WITHDRAWAL

An amount withdrawn from your “Savings Component” prior to retirement will be added to your gross income and taxed as normal income according to your marginal tax rate.

How will the “Savings Component” be treated on retirement?

  • On your retirement you will be able to elect to take the full remaining value in your “Savings Component” as a lump sum or as an annuity or as a combination of a lump sum and an annuity.
TAXATION ON RETIREMENT
  • Any amount taken as a lump sum will be taxed in the same manner as a lump sum received from the “Vested Component” on retirement (see the discussion above).
  • An annuity will be added to your gross income and taxed as normal income according to your marginal tax rate..
THE “RETIREMENT COMPONENT”

What will the “Retirement Component” consist of?

The “Retirement Component” will consist of two thirds of your contributions made to a pension, provident or retirement annuity fund from 1 September 2024, plus subsequent investment growth thereon.

When will you be allowed to withdraw from the “Retirement Component” before retirement?

Generally, you will not have access to the “Retirement Component” before you retire. The only exceptions to this rule are the following:

  • If you cease to be a South African tax resident for a continuous period of three years; or
  • If you depart from South Africa upon the expiry of a work or visitor’s visa.
TAXATION ON WITHDRAWAL
  • If you qualify to withdraw from your “Retirement Component” before retirement, the lump sum will be taxed in the same way as a withdrawal from the “Vested Component” prior to retirement is taxed.

How will the “Retirement Component” be treated on retirement?

  • The full value in your “Retirement Component” must be used to purchase an annuity (income) on retirement and no lump sum payment may be paid from this component.
  • There is however one exception to the above rule: If the cumulative value of two thirds of your “Vested Component” (excluding vested rights in respect of pre-1 March 2021 provident or provident preservation fund membership) plus the full value of your “Retirement Component” does not exceed R165 000, the full value of your “Vested Component” and “Retirement Component” may be taken as a lump sum. Remember: if you have more than one contract (policy) in a retirement annuity or a preservation fund, the cumulative value of two thirds of your “Vested Component” plus the full value of your “Retirement Component” of all contracts will be added together to establish it the limit of R165 000 has been exceeded.
TAXATION ON RETIREMENT
  • The annuity received after retirement will be added to your gross income and taxed as normal income according to your marginal tax rates.
  • If you qualify and elect to take a lump sum on retirement, it will be taxed in the same manner as a lump sum received from the “Vested Component” on retirement (see the discussion above).

WHAT ARE THE INSTANCES WHERE THE “TWO POT” SYSTEM WILL NOT APPLY?

Provident fund members who were 55 years of age or older on 1 March 2021 and remained members of the same provident fund.

Provident fund members who were 55 years of age on 1 March 2021 and remain member so the same fund, will be allowed to elect if they want to be subjected to the “Two Pot” system or not within 12 months from 1 September 2024:

  • If they do not elect to be subjected to the “Two Pot” system, the status quo would remain, and they would be able to access the full fund value as a lump sum on retirement. This would however mean that they would not contribute to a “Savings Component” and therefore not have access to their provident fund savings before retirement, unless they resign, are dismissed or retrenched from employment.
  • If they elect to be subjected to the “Two Pot” system, ten percent of the value of their “Vested Component” in the provident fund as on 31 August 2024 but limited to a maximum amount of R30 000, will be allocated to the “Savings Component” on the last day of the month in which such election was made. The member would be able to make contributions to the “Savings Component” and “Retirement Component” from the month following the date of election, and this would be subject to the provisions of the “Two Pot” system as discussed above. The remaining value in the “Vested Component” plus subsequent investment growth thereon, would be available as a lump sum on retirement.
“Legacy” retirement annuity fund policies

“Legacy” retirement annuity fund policies will be excluded from the “Two Pot” system, but only if it contains certain features and were issued before 1 September 2024. The reason for this is that the inclusion of such policies would require a re-design of the product structure thereof.

Other exclusions from the “Two Pot” system

  • Pensioners, i.e. persons that had already retired from a fund.
  • Beneficiary Funds: funds administering benefits that were paid on the death of a fund member on behalf of beneficiaries.
  • Unclaimed Benefit Funds.
IN CLOSING

Please take note that the final legislation surrounding some aspects of the “Two Pot” system has not been promulgated yet and some of the features discussed in this communication may be amended in future.

Disclaimer:
This communication is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. PWM and its directors, officers and employees shall not be responsible and disclaim all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of, or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this communication.