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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

Open letter from Prof Jonathan Jansen to all UFS students
2014-02-22

Dear Students of the University of the Free State

In the past four years there has emerged a new consensus on the three campuses of the University of the Free State (UFS) about the things that divide us – such as racism, sexism and homophobia. Students and campus leaders have worked hard to develop this new consensus in residences and in the open spaces on campus. There can be no doubt that new bonds of friendship have developed across the markers of race, ethnicity, class, religion and sexual orientation. I bear witness to these new solidarities every day on the campus.

You chose a white student to head up the transformation portfolio on the SRC. You chose a black captain to head up the university’s first team in rugby. You chose a white “prime” as head of residence to lead a predominantly black men’s residence. You chose a South African woman of Indian descent as Rag Queen and last week, a black student from Cape Town as the men’s Rag winner—choices not possible and never made before in our campus history. Many of you have intimate friends who come from different social or cultural or religious backgrounds. You learn together, share rooms together, pray together and party together. In other words, in the day to day workings of this university campus, you have demonstrated to campus, city and country that we can overcome the lingering effects of racism and other maladies in this new generation. You have helped create a university community inclusive of people of diverse religions, abilities, class and sexual orientation.

I have said this repeatedly that from time to time this new consensus will be tested – when a minority of students, and they are a small and dwindling minority, still act as if these are the days of apartheid. And when that consensus is tested as it was this week, and as it will be tested in the future, only then we will be able to assess the strength and durability of our progress in creating a new South African campus culture of human togetherness based on respect, dignity and embrace.

The real test of our leadership, including student leadership, is how we respond when our transformation drive is threatened.

Let me say this: I have absolute faith in you, as students of this great university, to stand together in your condemnation of these vile acts of violence and to move together in your determination to maintain the momentum for the Human Project of the University of the Free State. We have come too far to allow a few criminals to derail what you have built together in recent years.

There will, no doubt, be unscrupulous people on all sides of the political spectrum wanting to milk this tragedy for their own narrow purposes. There will be false information, rumours and exaggerations by those who wish to inflame a bad situation to gain mileage for their agendas. That is inevitable in a country that is still so divided.

I ask you, through all of this, to keep perspective. Two or ten or even twenty students behaving badly do not represent 30,000 students; a minority of violent and hateful persons do not represent the ideals, ambitions and commitments of the majority. At the same time, let us be realistic – anyone who thinks you can drive transformation without resistance clearly does not understand the difficult process of change.

The events of the week remind us, however, that we still have a long road to walk in deepening social and academic transformation at our university. Yes, we have invested hundreds of hours in training and mentorship; we have created new structures – such as the Institute for Reconciliation and Social Justice – to capture the energy and imagination of students driving transformation; we have created many opportunities for students to study and travel on this and other continents to enable cross-cultural learning; we have established formal and informal opportunities to dialogue about difficult issues on and off campus between students and their leaders; and we crafted new curricula to enable teaching and learning on the big questions of our times.

But this is clearly not enough, and so I have decided on the following immediate next steps:
  1. We will meet for several hours next week to think about how we can deepen the transformation of our university after this terrible incident.

  2. We will arrange a University Assembly on the events of the past week so that we speak with one voice on human wrongs and to re-commit to human rights and we will continue with open forum discussions during the months to come.

  3. We will review the entire spectrum of programmes, from orientation to residence life to the undergraduate curriculum, to determine how effective our interventions really are in reaching all students with respect to basic issues of human rights.

  4. We will review our media and communications strategy to determine how far and deep our messages on human rights travel across all sectors of the university community. In this regard it is important that the campus be blanketed on a regular basis with our condemnation of human wrongs and our commitment to human rights.

  5. We will commission the Institute for Reconciliation and Social Justice to review the events of the past week and make recommendations on how we can improve the campus environment so that all students are protected from harm inside residences, classrooms and in open spaces of the campus.

  6. We will take the questions raised during this week into the academic community and to the general staff of the university so that all personnel also engage with our own roles and responsibilities with respect to campus transformations.

  7. We undertake to make annual report-backs on transformation to all stakeholders in public forums so that students and staff and external communities can track the progress of the university on matters of human rights on campus.

I wish to thank my staff for acting firmly as soon as this tragic event came to our attention. We worked through the night to find and identify the perpetrators. We traced the two students and immediately handed them to the police. They were expelled. And throughout this process we offered counselling and support to the victim of this violent act.

The two former students were expelled and will now face justice in the criminal courts. It is hoped that in the course of time they will come to their senses and seek restoration and reconciliation with the student they so callously harmed. They are not part of the university community anymore.

That is the kind of university we are.

Jonathan D Jansen
Vice-Chancellor and Rector
University of the Free State
20 February 2014

 
Note: The use of the word ‘campus’ refers to all three campuses of the UFS, namely the Bloemfontein Campus, South Campus and Qwaqwa Campus.

 

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