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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

UFS launches projects to assist communities and current students
2011-03-16

Prof. Jonathan Jansen, UFS Vice-Chancellor and Rector and Mr Rudi Buys, Dean: Student Affairs, with learners at the  Bloemfontein-Oos Intermediary School.
Photo: Stephen Collett

The University of the Free State (UFS) has launched four exciting projects set out to improve the circumstances of its current and prospective students. These include a project that will honour dedicated and influential educators.

These community service projects in the starting blocks are: the UFS Schools Partnership Project, Extreme Make-over Project, Great Teachers Project and the No Student Hungry Campaign.
 
The Schools Partnership Project aims to support 21 schools across the Free State in helping them to become top achievers in the next three to five years. The schools involved were selected last year, after which the groundwork for the project was finalised. Although it mainly focuses on improving scholars' results in mathematics, accounting, physical sciences and English, it is also custom-designed according to the specific needs of the school, as indicated by the respective governing bodies beforehand. As a bonus, scholars of the schools involved will be given an opportunity to be introduced to student life; something Dr Choice Makhetha, UFS Vice-Rector: External Relations (acting), claimed to be of great importance. “We will invite Grade 10 to 12 learners to winter and summer schools being presented at the university. We will connect learners with students (one student adopts one learner for the day) for them to experience campus life. Grade 12 learners will also receive an invitation to the May 2011 graduation ceremony,” Dr Makhetha said.
 
Adding to the university's involvement at schools on local level, the newly upgraded Bloemfontein-Oos Intermediary School with its 112 UFS-sponsored tables will officially be revealed by the end of April. Although this school's upgrade showcases the power of partnerships, it is of special importance to the university, as it also marks the first school to receive an extreme make-over as part of the 'Extreme Make-over for Schools Project'. This project, in conjunction with the local business community, university staff and students, the community, the Department of Basic Education and SIFE (Students in Free Enterprise), is considered to be a flagship project of the Vice-Chancellor and Rector, Prof. Jonathan Jansen. Part of the project’s agreement includes visits from a group of about 100 students representing campus initiatives such as the UFS’s Kovscom, Rag and SIFE, which will contribute to the improvement of the schools' resources within a period of 10 – 15 weekends. “We invite support from all corners. South Africa has a business community committed to improving the social circumstances of its community and we plead that they also come to the rescue of the Bloemfontein-Oos Intermediary School,” said Dr Makhetha.
 
By spreading a 'can do' attitude, the UFS aims to honour noble and remarkable teachers across the country by means of its 'Great teacher's project'. Through the project, fellow citizens are encouraged to submit their stories on their former or current teachers’ dedication and their positive impact which are often overlooked. The panel of seasoned education scholars and practitioners will select the top 500 stories based on the stories' clarity, distinctiveness, plausibility and affectability, which will be perpetuated in a book called 'Great Teachers', to be released at the end of this year. Proceeds are destined to serve as bursaries for students who wish to pursue a career in education. According to Prof. Jansen the ideal teacher is: “Somebody who was among, but stood out above, their colleagues, a person who made a lasting impact long after the details of subject matter content of examination preparation were forgotten.”
 
Regardless of this exceptional effort of supporting schools across the province, the UFS remains committed to its students and their social welfare by means of the 'No student hungry' campaign. This project provides financially challenged students the opportunity to purchase food from the Thakaneng Bridge on the Main Campus in Bloemfontein by using their student cards at two selected kiosks serving balanced meals. The project, which is under the guardianship of Ms Grace Jansen and Dr Carin Buys, relies solely on several fund-raising projects across the country. These women are the respective spouses of the Rector and Dean: Student Affairs, Mr Rudi Buys. According to Ms Jansen this initiative was proposed after UFS staff reported that many students were struggling to concentrate on their studies due to hunger pangs. Although the campaign recognizes students with strong academic records, it doesn't overlook those who need a food bursary which might result in them dropping out. Ms Jansen said as the external funds gathered increase, so will the amount of students being supported by the project. “The plan is to continue until the fate of hungry students had come to an end,” she said.
 

Media Release
14 March 2011
Issued by: Lacea Loader
Director: Strategic Communication
Tel: 051 401 2584
Cell: 083 645 2454
E-mail: news@ufs.ac.za

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