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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

“My time at the UFS was the golden gem of my career”
2016-07-04

Description: Zig Gibson Tags: Zig Gibson

Prof Alan St Clair Gibson
Photo: Oteng Mpete

“My time at the University of the Free State (UFS) was the golden gem of my career. I have worked at medical schools or biomedical research centres in the United Kingdom, United States and at some of the top medical schools in South Africa, but working at the UFS was one of the highlights of my career,” says Prof Alan St Clair Gibson, Head of the UFS School of Medicine.

After spending just over two years at the UFS, Prof St Clair Gibson resigned from the institution in June 2016 and will take up the position of Dean: Health and Human Performance Sciences at the Waikato University in New Zealand in mid-July, where he will assist to establish a new faculty for all the health-science disciplines. “It was a privilege to work at the UFS. I come from a strong research background and wanted to grow research at the university, which I achieved. I came to the UFS because of the Academic and Human Projects and am proud of what has been achieved at the School of Medicine during the time I was here,” he said.

Prof St Clair Gibson highlighted some of these achievements, including the development of a management infrastructure across the disciplines of the school. “The establishment of an executive management committee for the school, as well as research champions in departments, highlighted the importance of proper governance and strategic management. By developing data dashboards, my management team and I could develop an understanding of research income and productivity, how the school works, what the role of teaching and learning is, and how the school could benefit in terms of third-stream income from the many contracts obtained by its academic staff. As a result, contracts and the financial management model of the school have also been reconfigured to the benefit of the university so that the institution and school can benefit from it,” he said.

His strong belief in an open-door policy has made staff feel part of the environment and it has created an atmosphere of equality and inclusivity. He believes in staff development and has, for instance, established leadership and management courses for heads of departments. Another factor to be proud of is the increase in the number of young researchers who recently joined the school, such as Prof Ross Tucker, who is one of the foremost sport scientists in the country. “It is a fact that staff retire or resign in all schools and departments of any university. It is also true that these departures offer opportunities to bring new academic and professional staff into the UFS. In fact, for the first time virtually every department in the School of Medicine now has a full-time Head of Department and 46 new staff were appointed since January 2015,” said Prof St Clair Gibson.

“I am especially proud of contributing, together with the senior leadership of the UFS, to stabilise the relationship with the Free State Department of Health (DoH). With the assistance of these parties, as well as my executive management team, we could find a better way of working together to the benefit of the school and the province.’’

Transforming the student profile to be representative of the country’s demographics is another milestone Prof St Clair Gibson will remember. “The intake of black and white students is of such a nature that we now have a much more balanced ratio of black and white undergraduate students than before.”

“I wanted to stay longer to see the effect of all the changes I made at the school, but the deanship is an offer I cannot refuse. I would have liked to see a steadier increase in the number of permanent clinical staff and have worked hard with both the UFS management and the DoH to try and achieve that; but more work needs to be done.”

I have worked with a number of fantastic staff members at the school, who are determined to do good in a challenging environment. I am amazed at the energy of the university leadership and how the Human and Academic Projects are executed. My wish for the university is to maintain and grow its standards and for the School of Medicine to maintain its reputation as one of the best schools in the country. I will always be a proud alumnus of the UFS,” he said.

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