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Dr Cecile Duvenhage
Dr Cecile Duvenhage is a lecturer in Personal Finance and Microeconomics, Department of Economics and Finance, University of the Free State (UFS), and the Editor and Co-Author: Personal Finance (Van Schaik Publishers).

Opinion article by Dr Cecile Duvenhage, Lecturer: Personal Finance and Microeconomics, Department of Economics and Finance, University of the Free State, Editor and Co-Author: Personal Finance (Van Schaik Publishers).


On 29 July 2022, the National Treasury released the 2022 Draft Revenue Laws Amendment Bill for public comment until 29 August 2022 to introduce the “two-pot” system for retirement savings that was flagged in the National Budget. The Revenue Laws Amendment Act was the first law approved by Parliament in 2023 and signed into law, giving effect to the new system and setting the implementation date. The Pension Funds Amendment Bill was approved by Parliament in May 2024. It introduces changes to the Pension Funds Act and includes funds not regulated by the Pension Funds Act in the new system. President Cyril Ramaphosa officially signed the Pension Funds Amendment Bill into law on July 21, 2024

The two-pot retirement system in South Africa (to be implemented on 1 September 2024) divides retirement savings into two distinct components: 1) the savings and 2) the retirement pot:

1) Savings Pot: About one-third of the contributions go into this pot that is designed for short-term financial goals and emergencies. Members will be able to access a portion of these savings before retirement if necessary, and can withdraw from it once a year (minimum withdrawal amount of R2 000) under specific conditions. 

However, according to the Citizen (22 July 2024) 30% of pension fund members in the Old Mutual Stable fund will have less than R2 000 in their savings pot and will not be able to claim. Informal sector workers often lack coverage, and traditional family-based care for the elderly is breaking down as urbanisation increases. Therefore, this system seems to benefit the middle-income group and (again) fail the poorest of the poor.

Keep in mind that access to the savings pot’s money has implications on both the tax that the individual pays and legal requirements during divorce proceedings. More specifically:

• Withdrawals are subject to taxation at the individual’s marginal tax rate
• Retirement fund administrators must be notified when divorce proceedings are initiated to ensure that no payments are made from the savings pot during the legal process. This ensures that the division of assets is handled correctly according to the legal requirements.

2) Retirement Pot: The retirement component ensures that the bulk of retirement savings – two-thirds – remain untouched until retirement age as stipulated by the fund. This preservation is crucial for securing long-term financial stability post-career. These funds are strictly preserved until retirement age, ensuring long-term financial security. Upon retirement, members can access these funds as a regular income stream, like a pension annuity.

Is it wise to take a portion of your pension?

There are also two sides to the Pension Funds Amendment Bill. Individuals and Financial Companies welcome this new law, as it allows the Financial Sector Conduct Authority (FSCA) to start approving rule amendments – submitted by various funds before 31 July 2024 – once gazetted.

Discovery was the fund to react the quickest with its proposed amendment rules. Some of the other retirement funds and administrators still have a substantial amount of work to do before they will be able to pay claims, including ensuring administration readiness and integration with SARS. SARS anticipates a R5 billion revenue windfall from taxing two-pot retirement system withdrawals in the next financial year. Thus, the government expects many hundreds of thousands of South Africans to access the savings component of their retirement funds as soon as the two-pot retirement system goes live.

Making use of the government’s lifeline – to protect the dignity of those in need and overcome financial stress – can be understood given the economic constraints facing individuals such as high unemployment, excessive debt, and inflation.

However, a wiser approach by the government should be to address the consequences and not the causes of citizens’ financial dignity. Given that less than 6% of individuals in South Africa can retire “without worries”, individuals should also have a good understanding that this “lifeline” is no quick fix for financial stress.

Hidden costs and other implications

Members of South African pension funds may generally access their pension pot from the age of 55. If you withdraw before the age of 55, there will be tax implications. This means that the withdrawal will be taxed similarly to your salary or other income. Any withdrawal is included in your gross income for the year, potentially pushing you into a higher tax bracket.

There will also be hidden costs in the form of penalties as stipulated by the member’s fund. The Institute of Retirement Funds Southern Africa has indicated an administration fee ranging from R300 to R600 on each withdrawal.

South Africa has a progressive tax system, where tax rates increase as taxable income rises. It is designed to be fairer by imposing a lower tax rate on low-income earners and a higher rate on those with higher incomes. Therefore, the amount that a member will get out depends on his/her marginal rate. Should a member be paying 45% tax on his/her taxable income (when earning more than R512 801 per year), a member might end up only getting slightly more than half of the withdrawal amount – once your tax-free benefit at retirement is exhausted.

Some further long-term benefits can be jeopardised when a member withdraws from the retirement savings. These are:

1) Tax-Free Benefit at Retirement: Keep in mind that withdrawals may reduce the tax-free benefit you enjoy at retirement. Up to R550 000 of the lump sum you take in cash at retirement may be tax-free, but this benefit can be eroded if you frequently withdraw from your savings pot before retirement.

2) Lost Tax-Free Growth: Additionally, withdrawing from your savings pot means losing out on tax-free growth. Savings in your retirement fund grow free of tax on interest income, dividends, and capital gains.

Apart from the tax implications, some pension providers will charge fees for withdrawals. Therefore, it is advisable to check with your pension administrator to understand any costs involved. In addition, withdrawing from your savings pot will reduce the remaining balance.

Early withdrawals can significantly affect your retirement savings. Every R1 withdrawn at age 35 could equate to as much as R30 less at retirement 30 years later.

“Two pots” may spoil the broth

Statistics from the Nedfin Health Monitor (2023) reveal that 90% of South Africans have inadequate savings for retirement, and a significant 67% of people in the country have no retirement savings beyond what they are putting into their employer-provided pension funds – which is often too little to be able to retire comfortably. The general rule of thumb is that individuals start saving as soon as possible, as much as possible, for as long as possible.

There is a saying that “too many cooks spoil the broth”. My personal view is that individuals need to be careful that “two pots” do not spoil the broth.

Although the system aims to balance immediate financial needs with long-term security, there is simply no way that individuals can eat their cake and have it. If the two-pot system is regarded as a bailing-out system, worry-free retirement remains a challenge for many. There is still a lot of thought needed for the two-pot system. Policymakers should consult the pension systems of the Netherlands, Iceland, Denmark, and Israel – which are regarded as having the best pension systems globally – to get an understanding of how adequacy, sustainability, and integrity are prioritised.

News Archive

Graduates should make a difference as leaders and be agents of change
2017-06-22

Description: Mid-year graduation read more 22 June 2017 Tags: Mid-year graduation read more 22 June 2017

More than 5 000 degrees will be conferred over six days
and eleven ceremonies at the UFS mid-year graduation
ceremonies.
Photo: Johan Roux

Livestream of Graduation Ceremonies

“Make the choice to make a difference as the leaders of the future.” These words of Dr Susan Vosloo, Cardiothoracic Surgeon and member of the University of the Free State (UFS) Council, echoed the call to graduates on the first three days of the UFS mid-year graduation ceremonies. The ceremonies are taking place in the Callie Human Centre on the Bloemfontein Campus from 19 to 26 June 2017.

Dr Vosloo, also an alumna of the UFS, was one of six guest speakers at the biggest set of graduation ceremonies in the university’s history. A spirit of excitement is part of the festivities, as a total of 5 258 degrees will be conferred over six days in eleven ceremonies. The graduation week will conclude on 26 June 2017, when 460 master’s and doctoral degrees will be conferred – 72 of these are doctoral degrees.

Stand up and be counted
Dr Vosloo urged the graduands at the afternoon session on 19 June 2017 to stand up and be counted. “What we need are leaders who treasure integrity, dignity, accountability, transparency, and who will focus on the common challenges which we all face today.”

Dr Khotso Mokhele, UFS Chancellor, also encouraged the graduates to be agents of change who shouldn’t conform to the current system. “Decide that it is your country and that you will decide what it should be. Then it will not be the corrupt experiment which the current government turned it into. We wish you well. Go and be the agents of transformation.”

Ambassadors of the UFS
Prof Francis Petersen, UFS Rector and Vice-Chancellor, asked the graduates to make a contribution: “Be excellent ambassadors of the UFS, and make the UFS, your families, and our country proud by your strong, innovative, ethical, and excellent contributions.” He was the guest speaker during the morning and afternoon sessions on 20 June 2017.

He also said that they should never forget the supporting role others played in their success, whatever form it took.

Do it for those who fought for SA
Justice Connie Mocumie, Judge of Appeal at the Supreme Court of Appeal, encouraged the graduates to go out and contribute to the development of the country. She was the guest speaker at the morning and afternoon ceremonies on 21 June 2017.

“It is important for you to continue being experts in your area of expertise,” she said.

“Today is the beginning of better days to come. Do it for the legacy of those who fought for our country in pursuit of a better South Africa.”

Dipiloane Phutsisi, Principal and Chief Executive Officer of the Motheo TVET College in the Free State, said everyone is destined for greatness. “In the words of Dr Martin Luther King: Everyone has the power for greatness, not for fame but greatness, because greatness is determined by service.” She was the guest speaker at the morning session on 19 June 2017.

Click here to see a list of Deans’ and Senate medals awarded.

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