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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

Conference: Expanded ARV treatment

2005-03-02

VENUE: University of the Free State, Bloemfontein, South Africa
DATE: 30 March 2005 - 1 April 2005

ARV Programme as on 24Feb Download Word document
Programme Special events Download Word document

Official web site www.fshealth.gov.za/subsites/arvc

Rationale for the Conference
At the time of the planned Conference, much ground would have been covered, both in the Free State and in South Africa, in respect of the expanded public sector ARV treatment programme in respect of research, experiences in practice, training of staff, treatment of patients, lessons learned, successes and failures, etc. The time would then be quite opportune to share these in a systematic manner with other provinces and countries, as well as with the large variety of stakeholders and role players in the ARV and related domains, be they academics and researchers, policy makers and service/facility managers, the variety of caregivers, and the community organisations and affected patients.

The Conference and current research
The proposed Conference is, firstly, directly linked to the current research on the public sector roll-out of ARV treatment in the Free State conducted by several research institutions (e.g. CIET, CHSR&D, UCT Lung Institute). Secondly, the Conference could and would serve as a forum for other research groups in the country and further a field to report and share knowledge and experiences on ARV treatment and related initiatives. Lastly, the Conference will stage a golden opportunity for researchers and scientists, on the one hand, and policy makers, managers, and caregivers (as knowledge users), on the other hand, to engage in cross-disciplinary discourse on this mutual and topical theme.

Theme of Conference
Expanded ARV treatment in the Free State: sharing experiences

Focus
The focus is primarily on public sector ARV treatment in the Free State, but also initiatives/activities/perspectives of relevance to the Free State elsewhere in the country at large and further a field, as well as relevant ARV initiatives in the public, private, NGO and FBO sectors. Bear in mind, however, that ARV treatment is but part of a much more comprehensive approach to HIV and AIDS. The Conference will, therefore, not narrowly focus on the ARV treatment programme only. The broader context, other relevant dimensions, and a comprehensive approach to the challenges of HIV, AIDS and TB are of equal importance.

The purpose of the Conference
Enhance meaningful exchange, mutual understanding and collaboration among researchers, scientists, policy makers, managers and practitioners in the field of ARV treatment and related fields.

Share experiences in the various spheres of ARV treatment and related spheres (policy, management, practice, research, training, public-private-civil society sectors).

Record, reflect and report on the establishment of the ARV treatment programme in the Free State, and in within the context of the comprehensive HIV/AIDS programme.

Disseminate important research results on ARV treatment and related themes to health policy makers, managers, practitioners, communities and to the research community.

Stimulate discourse among various disciplines and various stakeholders/role players involved in ARV treatment and related programmes.

Sensitise and acquaint researchers to the requirements of policy makers, managers and practitioners in respect of ARV treatment and related fields.

Facilitate the implementation of research results in ARV treatment policy, programmes and practice.

Dissemination of Conference-related information
Information generated during the Conference could feed into policy, management and practice of ARV treatment, the training accompanying such programme, and the existing body of knowledge. After the Conference the information will be disseminated via the Internet and by scientific and popular publications.

Date and duration
Set for 30 & 31 March & 1 April 2005; to commence at 09:00 on the first day (30 March) and to end at 16:30 (1 April) the third day.

Format and scope of Conference
Alternating plenary, parallel sessions and debates focused on topical issues and interest groups. The Conference will strive to be maximally interactive and participative.

Themes and topics to cover:

Policy, management and health services/practice (various levels and contexts – clinical treatment, information, IT systems, pharmacy, laboratories, nutrition)
Research covering all relevant disciplines and diverse dimensions of ARV treatment and related themes
Training and evaluation of training
Patients, communities and civil society organisations
Public, private, NGO, FBO initiatives and partnerships

Emphasis will be on the Free State, however, with of significant involvement from other provinces, SADC countries, and countries further a field. The thrust will be to export lessons and experiences from the Free State, but also to import lessons and experiences from other provinces, countries and sectors.

Presenters
Key presenters from the Free State, other provinces, South Africa, from the private, FBO and NGO sectors, and from several other countries

Delegates
About half of the delegates will be Free State stakeholders and role players (all levels and all contexts). The other half will be role players and stakeholders in the ARV and related fields from other provinces, the national level, and other countries, as well as from the private, public and non-governmental sectors.

Focused workshops
Provision will be made for half-a-day or one-day workshop initiatives on the third day (1 April 2005).

Enquiries
For more information please contact:

Prof Dingie van Rensburg
Centre for Health Systems Research & Development
University of the Free State
PO Box 339
Bloenfontein
SOUTH AFRICA
9300

Contact:
Carin van Vuuren
Conference Organiser
Centre for Health Systems Research & Development
University of the Free State
P.O.Box 339
Bloemfontein
South Africa
9300
Tel +27 (0) 51 401 2181
Fax +27 (0) 51 4480370
Cell 0832932890
e-mail: arvconference.hum@mail.uovs.ac.za

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