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The ‘two-pot’ retirement system: something is cooking

07 August 2024 Photo Supplied

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 to investigate implementation of quality-monitoring system for SA food industry

2006-02-07

Some of the guests who attended the workshop were from the left Prof James du Preez (Chairperson: Department of Biotechnology at the UFS); Prof Lodewyk Kock (Head: South African Fryer Oil Initiative (SAFOI) at the UFS)); Mrs Ina Wilken (Chairperson: South African National Consumer Union (SANCU)); Prof Herman van Schalkwyk (Dean: Faculty of Natural and Agricultural Sciences at the UFS) and Mr Joe Hanekom (Managing Director of Agri Inspec).
Photo: Stephen Collet

UFS to investigate implementation of quality-monitoring system for SA food industry

The University of the Free State (UFS) will be investigating the implementation of a quality-monitoring service for the South African food industry.

This was decided during a workshop to discuss the external quality monitoring in the edible oil industry of South Africa, which was recently held at the UFS.

Major role players in the fast-food sector like Nando's, Spur, Captain
Dorego's, King Pie Holdings, Black Steer Holdings, etc and various oil
distributors like Felda Bridge Africa, Refill Oils, PSS Oils and Ilanga Oils attended
the workshop. Also present was Mrs Ina Wilken, Chairperson of the South African National Consumer Union (SANCU) and key-note speaker of this workshop. She represented the consumer.

These role players all pledged their support to the implementation of this quality- monitoring system for the whole food industry.

The decision to implement this system follows the various malpractices reported in the press and on TV concerning food adulteration (eg the recent Sudan Red Scare), misrepresentation (eg olive oil scandal exposed in 2001) and the misuse of edible frying oils by the fast-food sector.

“One of the basic rights of consumers is the right to safe food. Consumers must be protected against foods and food production processes which are hazardous to their health. Sufficient guarantee of the safety of all food products and food production processes should be implemented. It does not help to have adequate food standards and legislation and there is no manpower to do the necessary investigation or monitoring,” said Mrs Wilken.

The South African Fryer Oil Initiative (SAFOI), under the auspices of the UFS Department of Microbial, Biochemical and Food Biotechnology, currently monitors edible oils in the food industry and makes a seal of quality available to food distributors.

“Last week’s decision to implement the quality-monitoring system implies that we will now be involving also other departments in the UFS Faculty of Natural and Agricultural Sciences who are involved in various aspects of the food chain in an endeavor to implement this quality monitoring system,” said Prof Herman van Schalkwyk, Dean: Faculty of Natural and Agricultural Sciences at the UFS and one of the main speakers at the workshop.

Prof van Schalkwyk said that the main aim of such a system will be to improve the competitiveness of the South African food industry. “It is clear that the role players attending the workshop are serious about consumer service and that they agree that fraudulent practice should be monitored and corrected as far as possible. Although some of the food outlets have the capacity to monitor the quality of their food, it may not seem to the consumer that this is an objective process. The proposed external monitoring system would counteract this perception amongst consumers,” said Prof van Schalkwyk.

The workshop was also attended by representatives from SAFOI and Agri Inspec, a forensic investigation company collaborating with inter-state and government structures to combat fraud and international trade irregularities.

Agri Inspec has been working closely with SAFOI for a number of years to test the content of edible oils and fats. “Extensive monitoring and control actions have been executed in the edible oil industry during the past four years to ensure that the content and labeling of oil products are correct. Four years ago almost 90% of the samples taken indicated that the content differed from what is indicated on the label. This has changed and the test results currently show that 90% of the products tested are in order. However, to maintain this quality standard, it is necessary that quality monitoring and educational campaigns are continuously performed,” said Mr Joe Hanekom, Managing Director of Agri Inspec.

“The seal of quality presented by SAFOI should also be extended to include all the smaller oil containers used by households,” Mrs Wilken said.

The SAFOI seal of quality is currently displayed mainly on some oil brands packed in bigger 20 liter containers, which include sunflower oil, cottonseed oil, palm oil etc which are used by restaurants and fast food outlets. “Any oil type is eligible to display the seal when meeting certain standards of authenticity. In order to display the seal, the distributor must send a sample of each oil batch they receive from the manufacturer to SAFOI for testing for authenticity, ie that the container’s content matches the oil type described on the label. This is again double checked by Agri Inspec, which also draws samples countrywide from these certified brands from the end-user (restaurant or fast food outlets). If in breach, the seal must be removed from the faulty containers,” said Prof Lodewyk Kock, Head of SAFOI.

“It should however be taken into account that oils without a seal of quality from the UFS can still be of high quality and authentic. Other external laboratories equipped to perform effective authenticity tests may also be used in this respect,” said Prof Kock.

“It is also important to realise that any oil type of quality such as sunflower oil, cottonseed oil, palm oil etc can be used with great success in well controlled frying processes,” he said.

Further discussions will also be held with the Department of Health, the SA National Consumer Union and Agri Inspec to determine priority areas and to develop the most effective low-cost monitoring system.

More information on the UFS oil seal of quality and oil use can be obtained at www.uovs.ac.za/myoilguide

Media release
Issued by: Lacea Loader
Media Representative
Tel: (051) 401-2584
Cell: 083 645 2454
E-mail: loaderl.stg@mail.uovs.ac.za
6 February 2006

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