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Monday, March 4, 2024

EXPLAINED: Proposals to access pension funds

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South Africans might soon be able to get access to their pension funds before retirement.

National Treasury has published guidelines for reforms to the retirement system that would allow South Africans to access one-third of their retirement savings throughout their career, while two-thirds will only become accessible on retirement.

The new proposal will mean that a member of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund will be able to make one withdrawal in any 12-month period – but that withdrawal may not be less than R2 000.

The proposal is for a two-pot system. “All pension funds, pension preservation funds, provident funds, provident preservation funds or retirement annuity funds will be required to allocate contributions from 1 March 2023 to a new retirement pot and a savings pot.

Up to 1/3 of contributions can flow to the “savings pot”, while the remainder should flow to the “retirement pot”. Contributions will remain deductible up to the specified caps, but any contributions more than 27.5% of taxable income or R350 000 p.a. can only flow into the retirement pot.

How will this work?

Question: Should I withdraw my funds from my pension or provident fund to exercise my right to a pre-retirement withdrawal? What if I lose my job and I always planned to have access to a pay-out from my pension if that were to happen?

Answer: All your rights will be protected for the funds that you have already contributed. The new pots will grow from the date of implementation, while the “vested pot” will still operate under the rules that were in place before the amendments.

Example

Person A is employed and has R200 000 in a provident fund at the time of implementation of these amendments on 1 March 2023. From 1 March 2023 onwards, one-third of their contributions are deposited into a “savings pot” and two-thirds of their contributions are deposited into the “retirement pot”.

After two years, there is R20 000 in the “savings pot”, R40 000 in the “retirement pot’ and R220 000 in the “vested pot”. Person A faces some financial difficulties and can withdraw the R20 000 from their “savings pot” without resigning to gain access to their retirement savings. Any amounts withdrawn from the “savings pot” would be included in Person A’s taxable income. No further withdrawals from the “savings pot” can be made for another year.

Pre-retirement withdrawals

Members will still be able to withdraw from the “vested pot”, which will be taxed through the applicable pre-retirement lump sum table. Should they need to, members will also be able to withdraw from the “savings pot” once in 12 months, with a minimum withdrawal of R2 000. All withdrawals from the “savings pot” will be included in taxable income, which means that it will attract the appropriate marginal tax rate to ensure all sources of income are taken into account to determine taxable income.

This proposal is open for public comment until the 29 August with the changes meant to come into effect on the 1 March 2023.

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