New draft rules on the proposed two-component (two-pot) retirement system

The anticipated draft amendments to laws that can implement the primary part of the two-component retirement system have been revealed for remark

Nationwide Treasury revealed the draft Income Legal guidelines Modification Invoice and the draft Income Administration and Pension Legal guidelines Modification Invoice for touch upon Friday, 9 June 2023 (Payments). These Payments will implement the primary part of the two-component retirement system with impact from 1 March 2024. For longstanding retirement fund members, there’ll successfully be three elements: a vested, financial savings and retirement element. The identical precept of taxation underlies the outdated and the brand new programs: contributions and build-up within the fund are tax-exempt, however withdrawals are taxed.

Under is our preliminary abstract of crucial features of the proposed laws. This isn’t an exhaustive abstract, because the laws is complicated and detailed. We have now additionally not mentioned legacy retirement annuity funds, implications for emigrants, or when there’s a divorce or on dying.

The vested element (retirement financial savings earlier than 1 March 2024)

This may embody contributions made as much as the implementation date, fund returns and another credit score quantities. A person who was by no means a member of a retirement fund earlier than 1 March 2024 won’t have a vested element.

A provident fund member who was 55 or older on 1 March 2021 will likely be allowed a option to, from 1 March 2024, (i) hold contributing to their vested element solely (they won’t have a financial savings or retirement element); or (ii) contribute to the financial savings or retirement elements solely (they’ll now not be capable of proceed contributing to their vested elements).

The financial savings element (one-third of contributions from 1 March 2024)

The seed capital for the financial savings element will likely be 10% of the vested element at 29 February 2024, to a most of ZAR 25 000. From 1 March 2024, one-third of retirement contributions will go into the financial savings element, which will likely be supplemented by fund returns and another credit.

The retirement element (two-thirds of contributions from 1 March 2024)

This will likely be made up from two-thirds of retirement contributions after 1 March 2024, fund returns and another credit. These funds can’t be accessed earlier than retirement.

Transfers

Transfers are solely permitted if all elements (vested, financial savings and retirement elements) in a transferor fund are transferred into the identical transferee fund.

Funds will be transferred tax free inside the similar fund (i) from the vested to the retirement element; or (ii) from the financial savings element to the retirement element.

A tax-free switch can be made out of one fund to a different fund (i) from the vested element to the vested element in one other fund; (ii) from the financial savings element to the financial savings element of one other fund; (iii) from the vested element to the retirement element of one other fund; and (iv) from a financial savings element to the retirement element of one other fund. That is topic to the rule that each one three elements have to be transferred to the identical transferee fund.

Typically, transfers from one fund to a different fund are potential if a member retires or resigns from a fund and joins one other.

Accessing the elements

That is in all probability the realm of most curiosity to retirement fund members. Emigrants wishing to entry their retirement funds have additional detailed guidelines which we’ve not mentioned right here. We have now additionally not mentioned entry to the retirement funds on dying of the member right here.

The vested element will be accessed on termination of employment (together with retrenchments), or upon retirement. Pre-retirement withdrawals are topic to tax utilizing lump sum withdrawal profit charges. At retirement, annuities are taxed at marginal charges, and lump sums at lump sum profit charges. The vested element isn’t normally accessible whereas a person remains to be employed.

The financial savings element will be accessed earlier than retirement and with out having to depart employment. A single withdrawal in a 12 months of evaluation is permitted, at a minimal of ZAR 2 000, which is taxable at marginal charges. The lump sum withdrawal of the financial savings element at retirement is topic to lump sum profit charges.

Members who choose to take lump sum withdrawals from the financial savings pot have to be conscious that their fund directors might want to apply to SARS for a directive on the quantity of tax that will likely be levied on this withdrawal. If the member is in arrears with their funds to SARS, SARS will difficulty a directive to the administrator to deduct the quantity it’s owed first, and solely the remaining steadiness will likely be paid to the member.

The retirement element can solely be accessed on retirement, and solely within the type of an annuity (together with a dwelling annuity). A lump sum withdrawal is allowed if the full worth of this element plus two-thirds of the vested element is lower than ZAR 165 000. Annuity funds are topic to PAYE and taxed at marginal tax charges, whereas lump sum withdrawals the place potential are taxed utilizing lump sum profit charges.

Nationwide Treasury will cope with withdrawals after retrenchment the place members haven’t any different type of earnings in Part 2 of the implementation of this technique. It desires to permit entry to retirement financial savings solely as a final resort.

When the member resigns from employment, the vested element within the employer fund could also be withdrawn as a lump sum, topic to tax; transferred to a preservation fund; or transferred to the retirement element, thus forfeiting the once-off withdrawal. On resignation, the member can also select to withdraw the complete worth within the financial savings element (if the one annual withdrawal was not used but). If one annual withdrawal was already taken and fewer than ZAR 2 000 stays, they will withdraw all the rest; or if one withdrawal was already used and the remaining steadiness is greater than ZAR 2 000, they might solely switch the steadiness to the financial savings element of their new retirement fund (tax free) and withdraw the financial savings element subsequent 12 months. (Once more, topic to the rule that each one there elements have to be transferred to the identical transferee fund).

When the member elects to retire, the principles for the vested element are the identical as underneath the present regime. The financial savings element, on retirement, will be withdrawn as a lump sum or transferred to the retirement element. The retirement element will be preserved or used to buy an annuity. Preservation at retirement is simply potential if the member has reached regular retirement age underneath the fund guidelines however has elected to not retire.

Outlined profit funds

The Payments present for equal therapy of outlined profit funds by proposing that the calculation of the one-third of contributions to be allotted to the financial savings element ought to be primarily based on a member’s pensionable service enhance, as contemplated within the guidelines of that fund. The identical calculation will apply to the remaining two-thirds, which will likely be allotted to the retirement element.

The 2-component system, whereas welcome, will likely be complicated to know at first, and it has many implications. We’d suggest that taxpayers take recommendation from a monetary adviser for his or her particular person conditions earlier than making any selections.