Pension funds and their managers have been forced to implement highly complex rule changes by the time South Africa's pension fund reform comes into force on 1 September 2025, rather than on 1 March 2025 as originally scheduled. We are in a race against time.
A big concern is that there is no final bill, which means around 3,000 retirement funds will have to amend their rules without knowing if there will be any changes again after the final bill is passed. To do.
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“There's still a lot of uncertainty, and we only have about six months to get all the processes in place,” said Jun Chong, a tax partner at Webber Wentzel.
“We need to bring the bill to Congress, vote on it, pass it, publish it and make it law. We really need it soon.”
She added that it is possible and hopes it will be completed smoothly.
Nikki van Vuuren, senior associate at Webber Wentzel, said pension funds still need to communicate all changes to members, and members need to understand what the changes mean for their retirement. Stated.
“The problem is, you can't educate people unless you know what's in the final law,” Van Vuuren said.
“Even if there is a general understanding… [are] There are still a lot of small nuances that need to be finalized. No date has yet been set for the final bill to be published, with parliament only beginning on February 2nd. ”
Jenny Klein, principal associate at ENSafrica, says there are two competing goals. Some people are in dire need of accessing their retirement savings, especially due to the COVID-19 pandemic.
Meanwhile, the industry wanted to have enough time to implement these far-reaching changes. She says it's important to get it right to avoid confusion when millions of members want to cancel and the system isn't in place.
new system
The new system has three components. Upon implementation, the value of a member's retirement savings is fixed. That's a vested component. Current rules will continue to apply to this part, with one-third of the lump sum up to R550,000 being tax-free and two-thirds annuitized upon retirement.
The savings component (savings pot) includes 'seed capital' which is automatically transferred to the savings pot. This is 10% of the vesting pot of up to R30,000. From now on, one-third of your contributions will be allocated to the savings pot and two-thirds to the retirement portion (retirement pot).
Read: Pension savings are not immediately available in a two-pot scheme
Contributions and retirement pot increases are retained until you retire from the fund.
“People won't be able to quit their jobs to tap into their retirement savings,” Klein says.
They can withdraw from their savings pot once in a tax year, and any missed withdrawals are carried over to the following year. “This is the floating portion of your retirement savings. However, pre-retirement withdrawals are subject to ordinary income tax rates,” he warns Chong.
Source: Sars
Klein said the question arose as to whether it was appropriate to tax individuals at marginal rates of up to 45% on savings pot withdrawals. Responses to this bill proposed a flat tax rate or some kind of exemption.
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“Treasury did not accept any response that corrected that point. We do not believe there will be any change in the tax treatment of pre-retirement savings withdrawals.”
Tax directive
The South African Revenue Service (SARS) will need to be prepared to issue millions of directives once the system is introduced, as pension funds do not know what an individual's marginal tax rate will be given different sources of income. be.
“If someone loses a job or has a significant reduction in income, you want them to benefit from the current tax rate,” Klein says.
She gives another example where an individual withdraws R20,000 from a savings pot. Although it is below the tax threshold, the amount is part of your gross income for the tax year and may be taxed. There may be a deficiency in the taxes paid. This is also not a desirable situation.
Chong warns that the situation where people are left with unpaid taxes is even worse.
The general rule is that if a lump sum order is applied for, Sars can instruct the retirement fund administrator to withhold any liability against the lump sum.
“It's not clear whether this will happen with savings withdrawals, but my gut feeling is that they will do it.”
She gives the example of an individual who has withdrawn R30,000 in seed capital but has R7,000 in unpaid taxes. If that person's tax rate is 25%, the tax on the withdrawal will be R7,500 for him. This means that the person will be owed R22,500. Tax liability of R7,000 = R15,500.
Concerns were raised about the impact on retirement savings if people were able to withdraw before retirement. Chong said the evidence shows that even if individuals withdraw a portion of their savings each year, the overall outcome is better because two-thirds is effectively locked in until retirement.
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Carmen Westermeier, a partner at Maitland & Associates, said she understands the logic behind the reforms. She believes this provides a viable solution for people who need to access money before retirement.
“The difficulty I see with this is that over a long period of time there will be new funds as well as traditional pension funds. Different tax treatments will have to run parallel to each other,” she said. say.
Klein added that retirement funds and their administrators face significant challenges. This should not be underestimated. “Retirement plans are complicated to begin with, even before you do something like this.”
