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07 August 2024 Photo Supplied
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

PhD students’ voices reverberate across Africa and beyond
2014-01-14

 

Noel Ndumeya, Tinashe Nyamunda, Ivo Mhike and Anusa Daimon
Photo: Hannes Pieterse
The Centre of Africa Studies (CAS) has been recruiting the best young scholars from across the SADC region – with magnificent success. In the span of six months, four PhD students have excelled both on the African continent and abroad.

Anusa Daimon, Noel Ndumeya, Ivo Mhike and Tinashe Nyamunda – the names of these distinguished students. Set against the backdrop of global excellence and competition, they have been awarded several positions at conferences and already published world-wide.

Anusa Daimon’s PhD studies at the CAS focuses on Malawian migrants and their descendants in Southern Africa. It explores issues of identity construction and agency among this group.

Since his arrival at the CAS, Daimon has won two fully-funded awards to attend international conferences and workshops. He was invited to attend the Young African Scholars Conference at Cambridge University in the UK. He also went to Brazil to the IGK Work and Human Lifecycle in Global History Summer Academy. This workshop explored the historical and modern meanings and practices of work in terms of ‘freedom’ and ‘unfreedom’.

Noel Ndumeya holds a special interest in environmental history and the aspects of conservation and conflict. His PhD hones in on land and agrarian studies with specific focus on South Eastern Zimbabwe.

Ndumeya has won an award from the African Studies Association United Kingdom (ASAUK). This earned him an invitation to Nairobi, Kenya, to work with an editor from the Journal of Southern Africa Studies (JSAS).

Ivo Mhike’s research specialises in youth culture and their relationship with the state. In his PhD he uses juvenile delinquency as a window towards an analysis of social constructs of youth behaviour. This includes youth policy and their institutional and administrative links to the state.

Mhike has been invited to attend the CODESRIA Child and Youth Institute in Dakar, Senegal, with the theme: Social Protection and the Citizen Rights of Vulnerable Children in Africa.

Tinashe Nyamunda specialises in African Economic History. His PhD thesis is entitled, “The State and Finance in Rhodesia: A study of the evolution of the monetary system during the Unilateral Declaration of Independence (UDI), 1965–1979”.

Under the direction of his primary supervisor, Prof Ian Phimister and his secondary supervisor, Dr Andrew Cohen, four of his papers have been accepted for publication. Nyamunda also received sponsorship from the Rector’s Office for an edited book collection of which he is the leading author. The book focuses on the many aspects of Zimbabwe’s blood diamonds.

Recently, Nyamunda has contributed papers at conferences in Botswana and Scotland and attended a workshop at Lund University in Sweden. He has also received an invitation from Germany and Oxford to present some chapters of his PhD thesis.

“The centre has provided the best working environment any PhD student can dream of,” Nyamunda said. He continued to remark that the opportunities Prof Jonathan Jansen has created opened up immense possibilities for them.

“Given these fruitful experiences in just a year at the university,” Nyamunda said,” imagine what can be accomplished given the resources and environment availed by the institution.” The prospects after his PhD studies looks bright, he concluded, because of the opportunities provided by the UFS.

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