Background
The legislation aims to enable members of occupational pension schemes to access a portion of their retirement savings during their employment in cases of hardship with the balance being preserved for retirement. This change is also expected to enhance members’ savings at retirement.
Key details
The legislation, which amends the Income Tax Act and the Pension Funds Act, creates two components of money with differing treatments for amounts accumulated before and after 1 September 2024, as follows:
The savings component
The savings component will be funded by one-third of the retirement contributions made to occupational pensions after 1 September 2024. Members will be permitted to make cash withdrawals of a minimum of ZAR 2,000 from the savings component once per tax year prior to retirement. Withdrawals are taxed at the members marginal rate of tax.
This component will be initially funded through a transfer from funds accumulated prior to 1 September 2024, of up to 10% of the member’s retirement fund balance, with a maximum of ZAR 30,000, whichever is lower.
Members can choose, before or after retirement, to transfer a portion or the full amount of their savings component to their retirement component to be used for an annuity. Such transfers are irreversible. The members will also have the choice to withdraw the full remaining balance in their savings component as a cash lump sum at retirement.
Treatment of assets accumulated prior to 1 September 2024, known as the “vested component”
This component includes savings and returns accumulated in the retirement account prior to 1 September 2024 minus the amount transferred to the saving pot. This component will continue to be subject to the previous rules and benefits even after 1 September 2024. This means that members will continue to have the right to:
- Full cash withdrawal at resignation and dismissal or retrenchment from an employer’s pension or provident fund
- Cash withdrawal of up to one-third of the vested component funds at retirement and use the remaining amount for an annuity.
Members will be able to choose, before or after retirement, to transfer a portion of their total vested component to their retirement pot to be used for an annuity. Such transfers are irreversible.
The retirement component
Starting 1 September 2024, two-thirds of a member’s retirement contributions will be assigned to the retirement component. This component will only be available to purchase an annuity at retirement. However, members who are no longer South African tax residents will be able to withdraw their retirement pot in cash before retirement, if they are moving abroad. In addition, if, at retirement, the amount of the member’s vested and retirement components combined is under ZAR 247,500, a full cash withdrawal of that amount will be possible. Taxation rules for the retirement fund currently in place will remain the same after 1 September 2024.
If the member dies, the retirement and saving components will be paid to the nominated beneficiaries, under the terms of the applicable legislation. This can be in the form of an annuity, a lump sum, or a combination of both.
The two-component approach will apply to Defined Contribution, Defined Benefit and hybrid plans, subject to some adjustment and flexibility according to the plan and excluding any legacy retirement annuity funds. More details on how the pot amounts will be calculated will be released at a later date.
Provident fund members aged 55 and older as of 1 March 2021 have the option to participate in the new system or remain in the old system. If they elect to participate in the new system, they cannot reverse their decision.
Next steps
Retirement Fund administrators are required to submit the required rule amendments to the regulatory authorities by 15 July 2024. Although the legislation has not been completely promulgated by the President of South Africa, there is a high degree of certainty that the changes will be effective from 1 September 2024. Employers are currently being notified by their retirement fund administrators on how the two-component system will be administered and how savings withdrawal claims will be processed. Employers should be actively conducting robust employee communications workshops and financial educational sessions that are easy to understand to ensure a successful implementation of the new system.
Written in collaboration with Lockton Global Partner: Chartered Employee Benefits
info@charteredeb.co.za
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