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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

Qwaqwa Campus opens: Prof. PA Mbati's speech
2005-01-22

Official welcome speech by Prof. PA Mbati for 2005 first year students held on Saturday 22nd January 2005. Program Director, The Chief Director Operations Rev. Kiepi Jaftha, Dean of Students Dr. Natie Luyt, Program Head of the Faculty of Humanities, Dr. Elias Malete, Program Head of Faculty of Natural and Agricultural Sciences, Prof. Riaan Luyt, Acting Program Head of the Faculty of Economics and Management Sciences Prof. Andries Venter, Deputy Director Student Affairs Mr. Teboho Manchu, Coordinator Finance: Mrs. Elizabeth Nchapi, Senior Librarian Mr. Stoffel Kok, Senior Magistrate Mr Saul Mohosho, SRC President Mr. Tello Motloung, members of staff, invited guests, parents, guardians, my dear students, ladies and gentlemen.

It is indeed my pleasure to welcome you to the official welcoming ceremony of the UFS-Qwaqwa Campus 2005 first year students. Our Rector and Vice Chancellor Professor Frederick has requested me to pass to you his warmest wishes and regards on this special occasion. I am confident that the orientation exercise in which you have participated has achieved the desired effect of introducing you to your new way of life here on campus, and that you are now sufficiently prepared to get on with the rigors of being a student at this University.

Following the restructuring of the higher education landscape, the Qwaqwa campus was incorporated into the University of the Free State with effect from January 1 2003 . As a consequence, Management was faced with a whole complex series of challenges including, primarily making the campus financially viable, but also ensuring that it remains relevant in it’s core business as a satellite campus of the University of the Free State in terms of its teaching, learning, research and community service responsibilities.

A whole series of strategic planning workshops were conducted last year with both internal and external stakeholders. Various important strategic objectives were flagged out, and the next level of consultation will take place soon. I know that there is a lot of eagerness, sometimes to the level of impatience to see this process completed as quickly as possible. But again on the other hand, due to the far reaching consequences of any hasty decisions, plus the need for a carefully planned process, we need to be a little more patient before the implementation of the strategic objectives is implemented. You will be kept informed as this important and critical aspect in the evolution of our campus takes place.

As a response to the need for a more effective governance model on the Qwaqwa campus, a review of the governance structure was completed towards the end of 2004 and will soon serve before the Executive of the Executive Management for approval.

Due to the importance that top management attaches to the development of an effective governance on the Qwaqwa campus, the process was facilitated by an internationally acclaimed consultant. Again the contents of the revised governance model will be made known to the campus and the broader community once it is approved.

I am glad to report that in recognition of the need to improve the infrastructure on campus to provide a conducive learning atmosphere to our students, a total of 8.2 million rands was made available towards the end of 2004 for recapitalization of specifically our student residences and lecture venues. The first phase of the residence renovation is completed and residences C, D and E have now been officially handed over to the University by the Contractor. Among the features of the renovated residences is that they will now computer rooms, kitchenettes for cooking, and a redesigned TV room. The rooms have even been fitted with heaters. Our challenge will now be to maintain our newly acquired facilities and to ensure that they do not again deteriorate to an un-acceptable level. The second phase of renovation will start soon.

As indicated in my address during the orientation week, our obligation to you as a campus is to offer you quality training to the best of our ability, and to disseminate this knowledge to you within a conducive atmosphere worthy of good learning. On the other hand, our students have to take advantage of this opportunity to acquire the necessary skills and training in the various academic programs that we offer on campus.

We have a very simple agenda on this campus – our vision is to continuously strive to build and develop the Qwaqwa campus of University of the Free State into a truly quality institution of higher learning in our country. To develop a tradition and culture in which we are proud of who we are, and constantly and tirelessly working towards excellence in our academic programs, and other non-academic but core and important aspects in your growth and development such as sport and community service. To nurture young conscientious citizens who are aware of their duties and responsibilities. Ultimately to produce hard working young people who fully exploit their potentials, and who will serve this country with diligence when unleashed into the real world in effectively managing their roles and responsibilities in society, whether in private or government civil service.

I would like to encourage that the various stake holders of this campus, the students, academic, administrative and support staff, and our broader community, to work together in harmony for the well being of our campus. For this campus to continue to be relevant in the environment that we find ourselves, there is a need for continuous engagement of its various stake holders, and genuinely listening to each other. We must continuously and regularly keep our feelers on alert in order that we can remain relevant.

I am particularly inviting our parents and guardians, the alumni of this campus, and leaders from our community to join hands with us in seeking solutions to the various challenges that we continue to face on campus. I am open for frank and honest discourse on the best way forward for our campus.

The University of the Free State is committed in making tertiary education accessible to as many students as possible. In this regard, students who do not have the required ‘M’ score to gain entry into main stream classes are given an opportunity to study in the highly successful ‘bridging program’ in which learners are integrated with main stream students but with fewer courses to tackle in order to ensure success. This is done on the premise that such students have the potential to pursue a degree course, and that therefore within a well structured program, they can make a success of their lives.

The University is conscious of the fact that in many instances several academically deserving students fail to be admitted into university due to financial reasons. For students who are academically deserving but who because of reasons of poverty cannot pay the requisite fees, the university is able to assist such students through the National Financial Aid Scheme – commonly known as NSFAS, and University Merit Awards. Other incentives such as Sports bursaries are also available.

Please remember that it is important to balance your life on campus and the phrase ‘a healthy mind in a healthy body’ aptly describes this statement. Ensure that you participate in sport and cultural activities of this campus so that you can develop and strengthen the various God-given talents that you have been blessed with.

A second major ingredient for your success on campus is discipline and respect for rules, policies and procedures that govern the University of the Free State , and respect for your fellow students. Good discipline is a major contributory factor to success in life, and more so in your formative academic life at University. This means for example that you must attend all your lectures, complete your assignments on-time and visit the library frequently. Please manage your time wisely and responsibly. Remember that as a university student, you are basically the master and architect of your own destiny.

Think very carefully when you are confronted with difficult situations, be they negative peer pressure, or temptations to indulge in intoxicating drugs, and make the right choice.

The University has well trained personnel including a social worker, a psychologist and counselor, and members of the student affairs division under the leadership of Mr. Teboho Manchu, Deputy Director Student Affairs, who are available to assist whenever you require their help.

Today is also a special day because we have officially inaugurated the SRC President and the rest of the SRC leadership. I am sure that you all join me in congratulating the SRC for being elected to their leadership roles for 2005. Mr. SRC president and your team, please remember that you now have a huge responsibility in carrying out the aspirations of the student body on campus. I want to wish you luck and success as you champion the rights of your constituents, which I believe and trust will be compatible with management’s expectations with regard to quality teaching and learning on campus. As you are aware, Management values the input that the student leadership makes in the operational management of the affairs of this campus, and we look forward to a cordial, non-confrontational working relationship with a view of rendering un-paralleled service on campus.

Mr. Program Director, allow me to wish everyone here a successful and prosperous year. May the good Lord give us the strength and courage to overcome any obstacle that may be placed in our way in the course of our work in 2005.

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