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Increased Tax Free Lump Sums - Budget 2023 Update

The tax table for lump sums that become payable on a member’s retirement, retrenchment, and death from a retirement fund, will be increased by 10%. This means that the tax-free amount that will become payable from 1 March 2023 will be increased from R500 000 to R550 000.  The tax table for lump sums that become payable on a member’s withdrawal, ie resignation and dismissal from a retirement fund, will also be increased by 10%. This means that the tax-free amount that will become payable from 1 March 2023 will be increased from the current R25 000 to R27 500.  The new proposed two-pot retirement system which will allow early access to retirement savings Government’s aim with introducing the two-pot system is to give members access to a portion of their retirement savings pre-retirement, while preserving the rest for their retirement.  Government will issue a second draft Tax Bill that will set out the revised proposals on how the two-pot system will work. The Tax Bill will also include how the proposals must be applied in an equitable manner to defined benefit funds and legacy retirement annuity funds. These are retirement annuity funds where the member has a guaranteed benefit at a determined age like in a defined benefit fund. In most cases these guaranteed benefits were funded by a lump sum contribution and the member is not contributing to them.  The second draft Tax Bill has not been issued, which makes it difficult to say for certain when and how the two-pot system will be implemented. But it seems that the first phase of the two-pot retirement system will become effective on 1 March 2024, and this is how it will work:

• Members will be allowed immediate access to a portion of their retirement savings on 1 March 2024. The second draft Tax Bill will include the details on the portion of the retirement savings that can be accessed.  

• All funds will have to implement a new retirement pot and savings pot, and each pot can receive retirement contributions and/or transfers. One-third of the member’s total contributions must go to the savings pot, and two-thirds to the retirement pot.   • Amounts contributed to the retirement pot cannot be accessed before retirement and at retirement date, the member must use the total amount to buy an annuity.  

• Amounts contributed to the savings pot can be accessed without any restrictions, limited to one withdrawal during any 12 months, and a proposed minimum withdrawal amount of R2 000.  

• A withdrawal from the savings pot will be added to the member’s taxable income in the year of withdrawal. This means it will be taxed at the member’s marginal tax rate and not on the withdrawal tax lump sum table. If the member decides to withdraw an amount from the savings pot as a lump sum on retirement, the available balance will be taxed on the retirement lump sum tax table.    

• Members who resign from their job will still be able to take their accrued retirement savings amount on 1 March 2024, ie vested benefit, as a lump sum.   As a second phase of the implementation of the two-pot system, government will review and issue proposals on whether to allow withdrawals from the retirement pot if a member is retrenched and has no alternative source of income.  Auto-enrolment of retirement fund members Not all employed South Africans belong to a retirement fund because currently it is not compulsory for employers to provide retirement fund benefits to their employees.

The Minister of Finance indicated that during 2023, National Treasury will finalise policy proposals, on how to expand the participation and coverage of all formal and informal workers in a retirement fund, without excessively burdening their disposable income. They will also consider a voluntary and flexible savings scheme for informal workers.