South Africa introduces new ‘two-pot’ pension system – implications for expats
President Cyril Ramaphosa signed the Revenue Laws Amendment Act into law on 1 June, which introduces a ‘two-pot’ system that gives members of retirement funds access to retirement savings without having to resign or cash out entire pension funds. It is scheduled to apply from 1 September.
The objective of the two-pot retirement system is to provide flexibility for fund members and to strike a balance between long-term security and immediate need. It comprises a savings and retirement component for contributions made after 1 September 2024.
Individuals will have access to amounts in the savings component before retirement for emergency expenditure or during periods of financial distress, while the amounts in the retirement component are to be preserved until retirement.
The ‘savings pot’ will hold one-third of your retirement contribution, while the retirement pot will hold the remaining two-thirds. Contributions made prior to 1 September 2024 will be ringfenced. This will be referred to as the ‘vested pot’, which will remain subject to the rules previously applied to retirement funds.
There will be a one-off compulsory transfer of 10% of your retirement savings from the vested pot to ‘seed’ the savings pot on 31 August. This transfer is capped at ZAR30,000. The rest of the funds will remain in your vested component.
Members will have immediate access to the savings pot under specific conditions. Withdrawals are permitted once per tax year and are taxable at the member’s marginal income tax rate. The first ZAR27,500 is free of tax. The minimum withdrawal is ZAR2,000 and there is no maximum limit.
Upon retirement, should a member wish to access a full or partial withdrawal from the savings pot, the lump sum withdrawal will be taxed according to the South African Revenue Service (SARS) Retirement Lump Sum Withdrawal Tax Table, which is generally lower than the marginal income tax rates. The first ZAR550,000 is tax-free.
Funds in the ‘retirement pot’ cannot be accessed until retirement, at which time the full retirement pot must be used to purchase an annuity.
The one exception to this rule applies if you emigrate from South Africa. In this case, emigrants will be able to access the retirement pot and any funds remaining in the savings pot as a lump sum if they can demonstrate that they have been a non-South African tax resident for three years.
An essential requirement is proof of non-tax resident status through a Notice of Non-Resident Tax Status Letter issued by SARS, which verifies the date when the tax residency ceased for the individual and is crucial for facilitating a withdrawal of funds.
Expats will also need to apply for an Approval International Transfer (AIT) TCS PIN to move the funds abroad.
Given the complexities of the new system, South African expats should seek professional advice to clarify the potential tax implications and undertake the encashment process smoothly. You will need to understand all aspects of the process, from ceasing your tax residency, to filing accurate tax declarations and successfully transferring your funds overseas.
