Latest News Archive

Please select Category, Year, and then Month to display items
Previous Archive
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

Media: Sunday Times
2006-05-20

Sunday Times, 4 June 2006

True leadership may mean admitting disunity
 

In this edited extract from the inaugural King Moshoeshoe Memorial Lecture at the University of the Free State, Professor Njabulo S Ndebele explores the leadership challenges facing South Africa

RECENT events have created a sense that we are undergoing a serious crisis of leadership in our new democracy. An increasing number of highly intelligent, sensitive and committed South Africans, across class, racial and cultural spectrums, confess to feeling uncertain and vulnerable as never before since 1994.

When indomitable optimists confess to having a sense of things unhinging, the misery of anxiety spreads. We have the sense that events are spiralling out of control and that no one among the leadership of the country seems to have a definitive handle on things.

There can be nothing more debilitating than a generalised and undefined sense of anxiety in the body politic. It breeds conspiracies and fear.

There is an impression that a very complex society has developed, in the last few years, a rather simple, centralised governance mechanism in the hope that delivery can be better and more quickly driven. The complexity of governance then gets located within a single structure of authority rather than in the devolved structures envisaged in the Constitution, which should interact with one another continuously, and in response to their specific settings, to achieve defined goals. Collapse in a single structure of authority, because there is no robust backup, can be catastrophic.

The autonomy of devolved structures presents itself as an impediment only when visionary cohesion collapses. Where such cohesion is strong, the impediment is only illusory, particularly when it encourages healthy competition, for example, among the provinces, or where a province develops a character that is not necessarily autonomous politically but rather distinctive and a special source of regional pride. Such competition brings vibrancy to the country. It does not necessarily challenge the centre.

Devolved autonomy is vital in the interests of sustainable governance. The failure of various structures to actualise their constitutionally defined roles should not be attributed to the failure of the prescribed governance mechanism. It is too early to say that what we have has not worked. The only viable corrective will be in our ability to be robust in identifying the problems and dealing with them concertedly.

We have never had social cohesion in South Africa — certainly not since the Natives’ Land Act of 1913. What we definitely have had over the decades is a mobilising vision. Could it be that the mobilising vision, mistaken for social cohesion, is cracking under the weight of the reality and extent of social reconstruction, and that the legitimate framework for debating these problems is collapsing? If that is so, are we witnessing a cumulative failure of leadership?

I am making a descriptive rather than an evaluative inquiry. I do not believe that there is any single entity to be blamed. It is simply that we may be a country in search of another line of approach. What will it be?

I would like to suggest two avenues of approach — an inclusive model and a counter-intuitive model of leadership.

In an inclusive approach, leadership is exercised not only by those who have been put in some position of power to steer an organisation or institution. Leadership is what all of us do when we express, sincerely, our deepest feelings and thoughts; when we do our work, whatever it is, with passion and integrity.

Counter-intuitive leadership lies in the ability of leaders to read a problematic situation, assess probable outcomes and then recognise that those outcomes will only compound the problem. Genuine leadership, in this sense, requires going against probability in seeking unexpected outcomes. That’s what happened when we avoided a civil war and ended up with an “unexpected” democracy.

Right now, we may very well hear desperate calls for unity, when the counter-intuitive imperative would be to acknowledge disunity. A declaration of unity where it manifestly does not appear to exist will fail to reassure.

Many within the “broad alliance” might have the view that the mobilising vision of old may have transformed into a strategy of executive steering with a disposition towards an expectation of compliance. No matter how compelling the reasons for that tendency, it may be seen as part of a cumulative process in which popular notions of democratic governance are apparently undermined and devalued; and where public uncertainty in the midst of seeming crisis induces fear which could freeze public thinking at a time when more voices ought to be heard.

Could it be that part of the problem is that we are unable to deal with the notion of opposition? We are horrified that any of us could be seen to have become “the opposition”. The word has been demonised. In reality, it is time we began to anticipate the arrival of a moment when there is no longer a single, overwhelmingly dominant political force as is currently the case. Such is the course of history. The measure of the maturity of the current political environment will be in how it can create conditions that anticipate that moment rather than seek to prevent it. We see here once more the essential creativity of the counter-intuitive imperative.

This is the formidable challenge of a popular post-apartheid political movement. Can it conceptually anticipate a future when it is no longer overwhelmingly in control, in the form in which it is currently, and resist, counter-intuitively, the temptation to prevent such an eventuality? Successfully resisting such an option would enable its current vision and its ultimate legacy to our country to manifest in different articulations, which then contend for social influence. In this way, the vision never really dies; it simply evolves into higher, more complex forms of itself. Consider the metaphor of flying ants replicating the ant community by establishing new ones.

We may certainly experience the meaning of comradeship differently, where we will now have “comrades on the other side”.

Any political movement that imagines itself as a perpetual entity should look at the compelling evidence of history. Few movements have survived those defining moments when they should have been more elastic, and that because they were not, did not live to see the next day.

I believe we may have reached a moment not fundamentally different from the sobering, yet uplifting and vision-making, nation-building realities that led to Kempton Park in the early ’90s. The difference between then and now is that the black majority is not facing white compatriots across the negotiating table. Rather, it is facing itself: perhaps really for the first time since 1994. Could we apply to ourselves the same degree of inventiveness and rigorous negotiation we displayed leading up to the adoption or our Constitution?

This is not a time for repeating old platitudes. It is the time, once more, for vision.

In the total scheme of things, the outcome could be as disastrous as it could be formative and uplifting, setting in place the conditions for a true renaissance that could be sustained for generations to come.

Ndebele is Vice-Chancellor of the University of Cape Town and author of the novel The Cry of Winnie Mandela

We use cookies to make interactions with our websites and services easy and meaningful. To better understand how they are used, read more about the UFS cookie policy. By continuing to use this site you are giving us your consent to do this.

Accept