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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

A bridge to the future for school leavers
2009-03-04

 
Ms Merridy Wilson-Strydom, Research Consultant at the Centre for Higher Education Studies and Development at the UFS. 
 Photo: Supplied)

Thousands of learners in the country’s high schools fail to qualify for post-school education and training. Now a unique project funded by the Ford Foundation and being piloted at the University of the Free State (UFS) seeks to provide such learners with a lifeline.

The 2008 Grade 12 results showed once again that the schooling system is – and has been for a long time – in the throes of a severe crisis. The most disturbing feature of this crisis is that the system does not produce learners with the required level of literacy, numeracy and other cognitive skills to further their education or to become part of the country’s workforce.

Clearly this situation is untenable in a developing country such as ours, facing the immense challenges of a severe skills shortage, poverty and unemployment. We cannot afford to have hundreds of thousands of young people walking the streets without any prospect of a decent living and a future of opportunity.

The UFS and partners in the Free State Higher Education Consortium (FSHEC) have devised a unique programme to help underprepared and even unprepared school-leavers who have fallen through the cracks of the school system.

“We are hoping to make a meaningful contribution to the challenging field of creating educational opportunities for post-school study and the world of work through the generous support of the Ford Foundation,” says Ms Merridy Wilson-Strydom, Research Consultant at the Centre for Higher Education Studies and Development at the UFS.

“The Skills for a Changing World Programme is specifically aimed at removing barriers to educational opportunities for school-leavers who are not able to access higher education – mainstream or extended degrees. At the moment there are few, if any, meaningful opportunities for those learners who come through the school system un/underprepared,” she says.

The primary target group for the NQF Level-5 Programme is young people between the ages of 18 and 25 who are currently excluded from post-schooling educational opportunities. The duration of the programme is one year.

According to Ms Wilson-Strydom, the core modules of the activity-driven curriculum are English Literacy and Language Development, Mathematical Literacy, Information and Communication Technology and Your Global Positioning System (YGPS), which focuses on study skills and critical life skills, e.g. dealing with diversity. Students will also be supported to make informed choices about their future study or career directions.

“The development of the core-module materials is almost complete and from the second semester we plan to test the programme by means of a pilot project, which will be conducted on the UFS’s South Campus in Bloemfontein,” says Ms Wilson-Strydom.

“The pilot study will involve a group of 20-50 learners who have finished Grade 12 but do not qualify for the UFS bridging programme known as the Career Preparation Programme or any other higher-education programmes,” says Ms Wilson-Strydom.

Although not yet accredited, the project team aims to have the programme accredited as a Higher Certificate and is also exploring the possibility of registering the programme as a Short Learning Programme.

“One of the challenges with access and bridging programmes in the country is that students do not obtain a formal qualification for their bridging year. Hence those who do not continue with higher-education study (or cannot continue for various reasons such as finances), do not gain the recognition they should get for what they have learnt during their bridging year.”

“Our focus on developing the Skills for a Changing World Programme as a qualification in its own right is a key innovation in the current education and training landscape,” says Ms Wilson-Strydom.

Media Release
Issued by: Lacea Loader
Assistant Director: Media Liaison
Tel: 051 401 2584
Cell: 083 645 2454
E-mail: loaderl.stg@ufs.ac.za  
4 March 2009
 

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