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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

Fight against Ebola virus requires more research
2014-10-22

 

Dr Abdon Atangana
Photo: Ifa Tshishonge
Dr Abdon Atangana, a postdoctoral researcher in the Institute for Groundwater Studies at the University of the Free State (UFS), wrote an article related to the Ebola virus: Modelling the Ebola haemorrhagic fever with the beta-derivative: Deathly infection disease in West African countries.

“The filoviruses belong to a virus family named filoviridae. This virus can cause unembellished haemorrhagic fever in humans and nonhuman monkeys. In literature, only two members of this virus family have been mentioned, namely the Marburg virus and the Ebola virus. However, so far only five species of the Ebola virus have been identified, including:  Ivory Coast, Sudan, Zaire, Reston and Bundibugyo.

“Among these families, the Ebola virus is the only member of the Zaire Ebola virus species and also the most dangerous, being responsible for the largest number of outbreaks.

“Ebola is an unusual, but fatal virus that causes bleeding inside and outside the body. As the virus spreads through the body, it damages the immune system and organs. Ultimately, it causes the blood-clotting levels in cells to drop. This leads to severe, uncontrollable bleeding.

Since all physical problems can be modelled via mathematical equation, Dr Atangana aimed in his research (the paper was published in BioMed Research International with impact factor 2.701) to analyse the spread of this deadly disease using mathematical equations. We shall propose a model underpinning the spread of this disease in a given Sub-Saharan African country,” he said.

The mathematical equations are used to predict the future behaviour of the disease, especially the spread of the disease among the targeted population. These mathematical equations are called differential equation and are only using the concept of rate of change over time.

However, there is several definitions for derivative, and the choice of the derivative used for such a model is very important, because the more accurate the model, the better results will be obtained.  The classical derivative describes the change of rate, but it is an approximation of the real velocity of the object under study. The beta derivative is the modification of the classical derivative that takes into account the time scale and also has a new parameter that can be considered as the fractional order.  

“I have used the beta derivative to model the spread of the fatal disease called Ebola, which has killed many people in the West African countries, including Nigeria, Sierra Leone, Guinea and Liberia, since December 2013,” he said.

The constructed mathematical equations were called Atangana’s Beta Ebola System of Equations (ABESE). “We did the investigation of the stable endemic points and presented the Eigen-Values using the Jacobian method. The homotopy decomposition method was used to solve the resulted system of equations. The convergence of the method was presented and some numerical simulations were done for different values of beta.

“The simulations showed that our model is more realistic for all betas less than 0.5.  The model revealed that, if there were no recovery precaution for a given population in a West African country, the entire population of that country would all die in a very short period of time, even if the total number of the infected population is very small.  In simple terms, the prediction revealed a fast spread of the virus among the targeted population. These results can be used to educate and inform people about the rapid spread of the deadly disease,” he said.

The spread of Ebola among people only occurs through direct contact with the blood or body fluids of a person after symptoms have developed. Body fluid that may contain the Ebola virus includes saliva, mucus, vomit, faeces, sweat, tears, breast milk, urine and semen. Entry points include the nose, mouth, eyes, open wounds, cuts and abrasions. Note should be taken that contact with objects contaminated by the virus, particularly needles and syringes, may also transmit the infection.

“Based on the predictions in this paper, we are calling on more research regarding this disease; in particular, we are calling on researchers to pay attention to finding an efficient cure or more effective prevention, to reduce the risk of contamination,” Dr Atangana said.


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