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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

Situation on the Bloemfontein Campus, and letter to parents
2016-02-28

Letter to parents from Prof Jonathan Jansen, Vice-Chancellor and Rector of the UFS 

 

Statement by Prof Jonathan Jansen, Vice-Chancellor and Rector of the University of the Free State (UFS) about the situation on the Bloemfontein Campus


1.    As all of you know, last night we witnessed a really tragic event at Xerox Shimla Park on the Bloemfontein Campus on the occasion of the Varsity Cup rugby match between NMMU (FNB Madibaz) and UFS (FNB Shimlas).
2.    The game started at 18:30 and about 17 minutes into the match, a group of protestors sitting on the north-eastern side of the stadium decided to invade the pitch and disrupt the game in progress.
3.    After a short while, some of the spectators also invaded the field, chasing and brutally beating those protestors whom they caught.
4.    As a university leadership we condemn in the strongest terms possible the vicious attack on the protestors. Nobody, repeat nobody, has the right to take the law into their own hands. While the protests were illegal and disruptive, it did not harm to the physical well-being of the spectators.
5.    The reaction from the group of spectators, however, not only opened old wounds, it trampled, literally and figuratively, on the dignity and humanity of other human beings. This we condemn in no uncertain terms, and no stone will be left unturned to find those who acted so violently on what should have been a beautiful occasion that also brought families and young children together to enjoy an evening of sport.
6.    I cannot over-emphasise our level of disgust and dismay at the behaviour of the spectators. It is NOT what the University of the Free State (UFS) is about and we are working around the clock to gather evidence on the basis of which we will pursue both charges and, in the case of students, also disciplinary action on campus.
7.    At the same time, the invasion of the pitch is also completely unacceptable and we will seek evidence on the basis of which we will act against those who decided to disrupt an official university event.
8.    Clashes between students occurred afterwards on campus and members of the Public Order Policing had to disperse some of them. The situation was stabilised in the early hours of the morning.
9.    Disruption continued this morning (23 February 2016) when students damaged some university buildings, a statue, and broke windows. Additional reinforcements from the South African Police Service were brought in to stabilise the campus. Additional security has also been deployed.


Broader picture
10.    We are very aware of the national crisis on university campuses and the instability currently underway. While the UFS has been largely peaceful, we have not been spared this turmoil, as last night’s events showed.
11.    We are also conscious of the fact that even as we speak, various political formations are vying for position inside the turmoil in this important election year. In fact, part of the difficulty of resolving competing demands is that they come from different political quarters, and change all the time.
12.    We are therefore learning from reliable sources that the Varsity Cup competition is, in fact, a target of national protests in front of a television audience.
13.    And we are aware of the fact that these protests are not only led by students but also by people from outside who have no association with the university. Just as the violent spectators involved on Monday night also included people from outside the university.

The demands

14.    My team has worked around the clock to try to meet the demands of contract workers demanding to be in-sourced. In fact, this weekend past, senior colleagues sat with worker leaders in the township to try to find ways of meeting their demands. We were hoping that such an agreement would be finalised by Monday afternoon (22 February 2016), but on the same Monday morning workers and students were arrested after moving onto Nelson Mandela Avenue, after which the South African Police Service (SAPS) took over as the matter became a public safety concern outside the hands of the university. Since then, it was difficult to return the workers to settle on a possible agreement.
15.    The fact is that the UFS has been in constant negotiation with contract workers to provide our colleagues with a decent wage and certain benefits. In fact, towards the end of last year we raised the minimum wage from R2 500 to R5 000. We were in fact hoping that the continued negotiations would improve that level of compensation even as we looked at a possible plan for insourcing in the future. We made it clear that if we could insource immediately, we would, but that the financial risk to the university was so great that it threatened the jobs of all our staff. Those negotiations were going well, until recently, when without notice the workers broke away and decided to protest on and around campus.
16.    While these negotiations were going on, the Student Representative Council (SRC) on Monday 22 February 2016 also decided to protest. While the vast majority of our 32 000 students were in classes and determined to get an education, a very small group led by the SRC President decided to protest; some invaded the UFS Sasol Library and the computer centre, and with the President eventually made their way to Xerox Shimla Park on which route they confronted the police, interrupted traffic and in fact injured some of our security staff as well as police officials.
17.    The university is definitely proceeding to collect evidence on these illegal and violent acts and will also act firmly against students involved in these protests.

Summary
18.    The events of Monday night represent a major setback for the transformation process at the UFS. While we have made major progress in recent years—from residence integration to a more inclusive language policy to a core curriculum to very successful ‘leadership for change’ interventions for student leaders—we still have a long way to go.
19.    One violent incident on a rugby field and we again see the long road ahead yet to be travelled. As I have often said before, you cannot deeply transform a century-old university and its community overnight. We acknowledge the progress but also the still long and difficult path ahead. We will not give up.
20.    We have 32 000 students on our campuses; the overwhelming majority of them are decent and committed to building bridges over old divides as we have seen over and over again. So many of our students, black and white, have become close and even intimate friends working hard to make this a better campus and ours a better community and country. Like all of us, they are gutted by what they saw on Monday, but the hundreds of messages I received from parents, students, and alumni this past 20 hours or so said one thing—keep on keeping on. And we will.

 

The Big Read: An assault on transformation (Times Live kolom deur Prof Jonathan Jansen: 25 Februarie 2016)

 

 

 


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