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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

Heart diseases a time bomb in Africa, says UFS expert
2010-05-17

 Prof. Francis Smit

There are a lot of cardiac problems in Africa. Sub-Saharan Africa is home to the largest population of rheumatic heart disease patients in the world and therefore hosts the largest rheumatic heart valve population in the world. They are more than one million, compared to 33 000 in the whole of the industrialised world, says Prof. Francis Smit, Head of the Department of Cardiothoracic Surgery at the Faculty of Health Sciences at the University of the Free State (UFS).

He delivered an inaugural lecture on the topic Cardiothoracic Surgery: Complex simplicity, or simple complexity?

“We are also sitting on a time bomb of ischemic heart disease with the WHO (World Health Organisation) estimating that CAD (coronary artery disease) will become the number-one killer in our region by 2020. HIV/Aids is expected to go down to number 7.”

Very little is done about it. There is neither a clear nor coordinated programme to address this expected epidemic and CAD is regarded as an expensive disease, confined to Caucasians in the industrialised world. “We are ignoring alarming statistics about incidences of adult obesity, diabetes and endemic hypertension in our black population and a rising incidence of coronary artery interventions and incidents in our indigenous population,” Prof. Smit says.

Outside South Africa – with 44 units – very few units (about seven) perform low volumes of basic cardiac surgery. The South African units at all academic institutions are under severe threat and about 70% of cardiac procedures are performed in the private sector.

He says the main challenge in Africa has become sustainability, which needs to be addressed through education. Cardiothoracic surgery must become part of everyday surgery in Africa through alternative education programmes. That will make this specialty relevant at all levels of healthcare and it must be involved in resource allocation to medicine in general and cardiothoracic surgery specifically.

The African surgeon should make the maximum impact at the lowest possible cost to as many people in a society as possible. “Our training in fields like intensive care and insight into pulmonology, gastroenterology and cardiology give us the possibility of expanding our roles in African medicine. We must also remember that we are trained physicians as well.

“Should people die or suffer tremendously while we can train a group of surgical specialists or retraining general surgeons to expand our impact on cardiothoracic disease in Africa using available technology maybe more creatively? We have made great progress in establishing an African School for Cardiothoracic Surgery.”

Prof. Smit also highlighted the role of the annual Hannes Meyer National Registrar Symposium that culminated in having an eight-strong international panel sponsored by the ICC of EACTS to present a scientific course as well as advanced surgical techniques in conjunction with the Hannes Meyer Symposium in 2010.

Prof. Smit says South Africa is fast becoming the driving force in cardiothoracic surgery in Africa. South Africa is the only country that has the knowledge, technology and skills base to act as the springboard for the development of cardiothoracic surgery in Africa.

South Africa, however, is experiencing its own problems. Mortality has doubled in the years from 1997 to 2005 and half the population in the Free State dies between 40 to 44 years of age.

“If we do not need health professionals to determine the quality and quantity of service delivery to the population and do not want to involve them in this process, we can get rid of them, but then the political leaders making that decision must accept responsibility for the clinical outcomes and life expectancies of their fellow citizens.

“We surely cannot expect to impose the same medical legal principles on professionals working in unsafe hospitals and who have complained and made authorities aware of these conditions than upon those working in functional institutions. Either fixes the institutions or indemnifies medical personnel working in these conditions and defends the decision publicly.

“Why do I have to choose the three out of four patients that cannot have a lifesaving operation and will have to die on their own while the system pretends to deliver treatment to all?”

Prof. Smit says developing a service package with guidelines in the public domain will go a long way towards addressing this issue. It is also about time that we have to admit that things are simply not the same. Standards are deteriorating and training outcomes are or will be affected.

The people who make decisions that affect healthcare service delivery and outcomes, the quality of training platforms and research, in a word, the future of South African medicine, firstly need rules and boundaries. He also suggested that maybe the government should develop health policy in the public domain and then outsource healthcare delivery to people who can actually deliver including thousands of experts employed but ignored by the State at present.

“It is time that we all have to accept our responsibilities at all levels… and act decisively on matters that will determine the quality and quantity of medical care for this and future generations in South Africa and Africa. Time is running out,” Prof. Smit says.
 

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