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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

The state of HIV/AIDS at the UFS
2010-05-11

“The University of the Free State (UFS) remains concerned about the threat of HIV/AIDS and will not become complacent in its efforts to combat HIV/AIDS by preventing new infections”, states Ms Estelle Heideman, Manager of the Kovsies HIV/AIDS Centre at the UFS.

She was responding to the results of a study that was done at Higher Education Institutions (HEIs) in 2008. The survey was initiated by Higher Education AIDS (HEAIDS) to establish the knowledge, attitudes, behaviours and practices (KABP) related to HIV and AIDS and to measure the HIV prevalence levels among staff and students. The primary aim of this research was to develop estimates for the sector.

The study populations consisted of students and employees from 21 HEIs in South Africa where contact teaching occurs. For the purpose of the cross-sectional study an ‘anonymous HIV survey with informed consent’ was used. The study comprised an HIV prevalence study, KABP survey, a qualitative study, and a risk assessment.

Each HEI was stratified by campus and faculty, whereupon clusters of students and staff were randomly selected. Self-administered questionnaires were used to obtain demographic, socio-economic and behavioural data. The HIV status of participants was determined by laboratory testing of dry blood spots obtained by finger pricks. The qualitative study consisted of focus group discussions and key informant interviews at each HEI.

Ethical approval was provided by the UFS Ethics Committee. Participation in all research was voluntary and written informed consent was obtained from all participants. Fieldwork for the study was conducted between September 2008 and February 2009.

A total of 1 004 people participated at the UFS, including the Main and the Qwaqwa campuses, comprising 659 students, 85 academic staff and 256 administration/service staff. The overall response rate was 75,6%.

The main findings of the study were:

HIV prevalence among students was 3,5%, 0% among academics, 1,3% among administrative staff, and 12,4% among service staff. “This might not be a true reflection of the actual prevalence of HIV at the UFS, as the sample was relatively small,” said Heideman. However, she went on to say that if we really want to show our commitment towards fighting this disease at our institution a number of problem areas should be addressed:

  • Around half of all students under the age of 20 have had sex before and this increased to almost three-quarters of students older than 20.

     
  • The majority of staff and a third of students had ever been tested for HIV.

     
  • More than 50% of students drink more than once per week and 44% of students reported being drunk in the past month. Qualitative data suggests that binge drinking over weekends and at campus ‘bashes’ is an area of concern.

Recommendations of the study:

  • Emphasis should be on increased knowledge of sexual risk behaviours, in particular those involving a high turnover of sexual partners and multiple sexual partnerships. Among students, emphasis should further be placed on staying HIV negative throughout university study.

     
  • The distribution of condoms on all campuses should be expanded, systematised and monitored. If resistance is encountered, attempts should be made to engage and educate dissenting institutional members about the importance of condom use in HIV prevention.

     
  • The relationship between alcohol misuse and pregnancy, sexually transmitted infections (STIs), HIV and AIDS needs to be made known, and there should be a drive to curb high levels of student drinking, promote non-alcohol oriented forms of recreation, and improve regulation of alcohol consumption at university-sponsored “bashes”.

     
  • There is need to reach out to students and staff who have undergone HIV testing and who know their HIV status, but do not access or benefit from support services. Because many HIV-positive students and staff are not receiving any kind of support, resources should be directed towards the development of HIV care services, including support groups.

Says Heideman, “If we really want to prove that we are serious about an HIV/AIDS-free campus, these results are a good starting point. It definitely provides us with a strong basis from which to work.” Since the study was done in 2008 the UFS has committed itself to a more comprehensive response to HIV/AIDS. The current proposed ‘HIV/AIDS Institutional response and strategic plan’, builds and expands on work that has been done before, the lessons learned from previous interventions, and a thorough study of good practices at other universities.

Media Release
Issued by: Mangaliso Radebe
Assistant Director: Media Liaison
Tel: 051 401 2828
Cell: 078 460 3320
E-mail: radebemt@ufs.ac.za  
10 May 2010

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