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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

Inaugural lecture: Prof Robert Bragg, Dept. of Microbial, Biochemical and Food Biotechnology

2006-05-17

Attending the inaugural lecture were in front from the left Prof Robert Bragg (lecturer at the Department of Microbial, Biochemical and Food Biotechnology) and Frederick Fourie (Rector and Vice-Chancellor). At the back from the left were Prof James du Preez (Departmental Chairperson: Department of Microbial, Biochemical and Food Biotechnology) and Prof Herman van Schalkwyk (Dean: Faculty of Natural and Agricultural Sciences). Photo: Stephen Collett

A summary of an inaugural lecture delivered by Prof Robert Bragg at the University of the Free State:

CONTROL OF INFECTIOUS AVIAN DISEASES – LESSONS FOR MAN?

Prof Robert R Bragg
Department of Microbial, Biochemical and Food Biotechnology
University of the Free State

“Many of the lessons learnt in disease control in poultry will have application on human medicine,” said Prof Robert Bragg, lecturer at the University of the Free State’s (UFS) Department of Microbial, Biochemical and Food Biotechnology during his inaugural lecture.

Prof Bragg said the development of vaccines remains the main stay of disease control in humans as well as in avian species. Disease control can not rely on vaccination alone and other disease-control options must be examined.

“With the increasing problems of antibiotic resistance, the use of disinfection and bio security are becoming more important,” he said.

“Avian influenza (AI) is an example of a disease which can spread from birds to humans. Hopefully this virus will not develop human to human transmission,” said Prof Bragg.

According to Prof Bragg, South Africa is not on the migration route of water birds, which are the main transmitters of AI. “This makes South Africa one of the countries less likely to get the disease,” he said.

If the AI virus does develop human to human transmission, it could make the 1918 flu pandemic pale into insignificance. During the 1918 flu pandemic, the virus had a mortality rate of only 3%, yet more than 50 million people died.

Although the AI virus has not developed human-to-human transmission, all human cases have been related to direct contact with infected birds. The mortality rate in humans who have contracted this virus is 67%.

“Apart from the obvious fears for the human population, this virus is a very serious poultry pathogen and can cause 100% mortality in poultry populations. Poultry meat and egg production is the staple protein source in most countries around the world. The virus is currently devastating the poultry industry world-wide,” said Prof Bragg.

Prof Bragg’s research activities on avian diseases started off with the investigation of diseases in poultry. “The average life cycle of a broiler chicken is 42 days. After this short time, they are slaughtered. As a result of the short generation time in poultry, one can observe changes in microbial populations as a result of the use of vaccines, antibiotics and disinfectants,” said Prof Bragg.

“Much of my research effort has been directed towards the control of infectious coryza in layers, which is caused by the bacterium Avibacterium paragallinarum. This disease is a type of sinusitis in the layer chickens and can cause a drop in egg product of up to 40%,” said Prof Bragg.

The vaccines used around the world in an attempt to control this disease are all inactivated vaccines. One of the most important points is the selection of the correct strains of the bacterium to use in the vaccine.

Prof Bragg established that in South Africa, there are four different serovars of the bacterium and one of these, the serovar C-3 strain, was believed to be unique to Southern Africa. He also recently discovered this serovar for the first time in Israel, thus indicating that this serovar might have a wider distribution than originally believed.

Vaccines used in this country did not contain this serovar. Prof Bragg established that the long term use of vaccines not containing the local South African strain resulted in a shift in the population distribution of the pathogen.

Prof Bragg’s research activities also include disease control in parrots and pigeons. “One of the main research projects in my group is on the disease in parrots caused by the circovirus Beak and Feather Disease virus. This virus causes serious problems in the parrot breeding industry in this country. This virus is also threatening the highly endangered and endemic Cape Parrot,” said Prof Bragg.

Prof Bragg’s research group is currently working on the development of a DNA vaccine which will assist in the control of the disease, not only in the parrot breeding industry, but also to help the highly endangered Cape Parrot in its battle for survival.

“Not all of our research efforts are directed towards infectious coryza or the Beak and Feather Disease virus. One of my Masters students is currently investigating the cell receptors involved in the binding of Newcastle Disease virus to cancerous cells and normal cells of humans. This work will also eventually lead to a possible treatment of cancer in humans and will assist with the development of a recombinant vaccine for Newcastle disease virus,” said Prof Bragg.

We are also currently investigating an “unknown” virus which causes disease problems in poultry in the Western Cape,” said Prof Bragg.

“Although disinfection has been extensively used in the poultry industry, it has only been done at the pre-placement stage. In other words, disinfectants are used before the birds are placed into the house. Once the birds are placed, all use of disinfectants stops,” said Prof Bragg.

“Disinfection and bio security can be seen as the ‘Cinderella’ of disease control in poultry. This is also true for human medicine. One just has to look at the high numbers of people who die from hospital-acquired infections to realise that disinfection is not a concept which is really clear in human health care,” said Prof Bragg.

Much research has been done in the control of diseases through vaccination and through the use of antibiotics. “These pillars of disease control are, however, starting to crumble and more effort is needed on disinfection and bio security,” said Prof Bragg.

Prof Bragg has been working in close co-operation with a chemical manufacturing company in Stellenbosch to develop a unique disinfectant which his highly effective yet not toxic to the birds.

As a result of this unique product, he has developed the continual disinfection program for use in poultry. In this program the disinfectant is used throughout the production cycle of the birds. It is also used to ensure that there is excellent pre-placement disinfection.

“The program is extensively used for the control of infectious diseases in the parrot-breeding industry in South Africa and the product has been registered in 15 countries around the world with registration in the USA in the final process,” said Prof Bragg.

“Although the problem of plasmid mediated resistance to disinfectants is starting to rear its ugly head, this has allowed for the opening of a new research field which my group will hopefully exploit in the near future,” he said.

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