2. Proposals affecting the retirement fund industry
2.1 Two-pot System
A member of a retirement fund, including a member who is retrenched, cannot withdraw any portion of their retirement component until retirement. During the public comment process on the two-pot system legislation, Government received requests to allow a member access to the retirement component upon retrenchment. The restructuring required for this proposed reform is complex and therefore forms part of the second phase of the two-pot system reforms.
Government started work on measures that may allow access to the retirement component if a member has been retrenched and is in financial distress. Strict conditions will apply to this access such as providing proof that the member has no alternative source of income after a period of time, such as payments from the Unemployment Insurance Fund (UIF), and limiting access to a percentage of income rather than a cash lump sum. National Treasury will engage stakeholders, including labour and industry, once the research is concluded.
A further aspect is that, with the enactment of the Revenue Laws Second Amendment Act (2024), a lump sum payable as a result of the death of a member is still a retirement fund lump sum benefit. However, the definition of “savings component” only makes provision for the treatment of the remaining balance in the savings component on retirement and not on death. As a result, any value in the savings component is only payable as a savings withdrawal benefit on death.
It is proposed that an amendment be made that, on the member’s death, should the nominees or dependents choose to receive a lump sum benefit, such lump sum benefit will be considered part of the retirement fund lump sum benefit for Income Tax Act purposes. The 2025 Revenue Laws Amendment Bill, dealing with this proposed clarification and other amendments to the Two-pot legislation, has been presented to Parliament together with the budget.
The Budget review further confirmed that to date, the tax on savings withdrawal benefits has surpassed the initial estimate of R5 billion for 2024/25, with tax collections amounting to R11.6 billion as of 31 January 2025.
Comment: While retrenchment can affect one’s financial wellbeing, it is critical that the principle of preservation underlying the two-pot system is not undermined. Any possible access to the retirement component should further be based on objective criteria, and as the Boards of retirement funds already have a considerable workload, our view is that no onus should be placed on them to establish whether a member experiences financial hardship.
2.2 Unclaimed assets
In September 2022, the Financial Sector Conduct Authority (FSCA) published a paper on unclaimed assets across the financial sector, titled A Framework for Unclaimed Financial Assets in South Africa. Following responses to, and consultation on, the recommendations put forward in the paper, the FSCA published a response document on the paper in March 2024. The National Treasury and the FSCA will work with the financial services industry to develop the recommendations from these papers, including a framework to manage unclaimed assets and the establishment of a central unclaimed assets fund.
Comment: It is critical that sufficient time is allowed for the tracing of beneficiaries before assets are transferred to a central unclaimed assets fund, where active tracing is unlikely to occur. The central unclaimed assets fund will further have to be subject to rigorous regulation and oversight to ensure the proper functioning thereof and to prevent possible corruption and fraud.
2.3 Financial inclusion and the ombud system
The National Treasury will develop a national strategy on financial inclusion in 2025 based on the policy paper, An Inclusive Financial Sector for All, which Cabinet approved in 2023. The National Treasury is also reforming the financial ombud system to make it simpler, accessible, comprehensive, efficient and effective. As part of these reforms, a National Financial Ombud Scheme was established and began operating on 1 March 2024 after being granted recognition by the Ombud Council. The National Financial Ombud is an umbrella financial services ombud scheme formed by the amalgamation of four ombud schemes: the offices of the Banking Ombud; the Credit Ombud; the office of the Long-term Insurance Ombud; and the Ombudsman for Short-term Insurance.
Comment: The Pension Funds Adjudicator will remain separate but will in due course be renamed the Retirement Funds Ombud.
2.4 Conduct of Financial Institutions (COFI) Bill
National Treasury is finalising the Conduct of Financial Institutions Bill (“the Bill”) together with comprehensive amendments to the Financial Sector Regulation Act and the Pension Funds Act and repealing various financial sector laws that are conduct focused. The Bill will streamline and harmonise the legal landscape that financial institutions will operate within and provide a single, holistic legal framework for market conduct regulation in South Africa that is consistently applied to all financial institutions.
The Bill has been published twice for public consultation, discussed at several workshops and revised to address the comments received. The final draft of the Bill is awaiting certification from the Office of the Chief State Law Adviser, whereafter it will be submitted to Cabinet for approval to be tabled in Parliament.
The FSCA is preparing for the Bill’s implementation, as will be explained in more detail in its 2025 Three-year Regulation Plan. The FSCA has already started informal engagements on some of the regulatory frameworks it intends to make once the Bill is passed, and these will continue over the next budget period.
In addition, the amendments to the National Payment System Act (1998) will be carved out from the schedule of the Bill into a standalone bill for the national payment system due to the length of the proposed amendments. Alignment will be maintained with the draft Bill and the Financial Sector Regulation Act. Given their interdependencies, it is envisaged that the two Bills will be processed concurrently, to the extent feasible.
Comment: The Conduct of Financial Institutions Bill, once enacted, will fundamentally change the regulatory landscape, and will have significant implications for the financial services industry. The amendments to the Pension Funds Act, initially proposed in the Bill, not relating to the conduct of funds and fund officers, will be contained in an Omnibus Bill, which may only be published in 2026.
2.5 Cross-border tax treatment of retirement
The current cross-border tax treatment of retirement funds may result in double non-taxation, particularly where South Africa is granted the taxing right by treaty. It is proposed that changes be made to the rules that currently exempt lump sums, pensions and annuities received by South African residents from foreign retirement funds for previous employment outside South Africa, with amendments in the current legislative cycle.
2.6 Clarifying the inclusion of an amount assigned to a non-member spouse under religious tenets
In 2024, the Pension Funds Act was amended to recognise court orders pertaining to the division of marital assets in accordance with religious tenets. However, the Income Tax Act requires a consequential amendment to paragraph 2(1)(b)(iA) of the Second Schedule to the Act, which deals with the taxation of pension interest allocations to non-member spouses in terms of a divorce order, to include amounts assigned to a non-member spouse in compliance with the tenets of a religion.
2.7 Early retirement programme for public servants
The 2024 Medium Term Budget Policy Statement (MTBPS) announced that Government would offer an early retirement incentive. Over the next two years, the 2025 Budget provides R11 billion in funding to incentivise public servants to retire early. Those wishing to pursue this option will have to apply, with approvals given only by the relevant executive authority. Up to 30 000 state employees are expected to opt for early retirement. The programme aims to manage staff headcount in a targeted manner and revitalise the public service.
2.8 Capital flows management framework
The 2024 Budget Review indicated that research will be undertaken to investigate the impact of recent reforms to modernise the foreign-exchange system and in turn promote trade and investment.
As part of this research, the International Monetary Fund conducted a technical review of the increase and harmonisation of foreign exposure limits for institutional investors to 45 per cent in 2022. The review stated that the increase could have been implemented in a more transparent and phased manner, but the depth of South African financial markets meant that capital outflows could be absorbed without significant impact on the exchange rate and bond prices. The review recommended that the institutional limit not be reduced from 45 per cent as the reputational, implementation and administrative costs would outweigh any potential benefits.
