Ndivhuho Netshitenzhe
SA’s much-anticipated two-pot retirement system will take effect on 1 September 2024. Under the new system, retirement fund members will be able to access a portion of their pension funds before retirement age. In the current system, members can only access these funds when they retire, are retrenched, or resign.
The temptation to access this pool of funds by resigning has proven too strong for many people. This is damaging for both the individual as well as the economy, especially given the country’s low savings rate. Between 2011 and 2020, over 6.1 million people have opted for early pension fund withdrawal, with an average of around 700 000 withdrawals every year since 2016.
According to the Association for Savings and Investment South Africa (ASISA), because of early withdrawals, only 6% of South Africans can retire comfortably. Although this statistic emphasises the urgent need for pension reform, the new retirement system is likely to have unintended short-term as well as long-term consequences for the economy, both positive and negative.
Why a new retirement system is needed
To dissuade individuals from accessing their retirement savings before retirement, higher tax rates are levied on early withdrawals. Since 2016, the tax on early withdrawals averaged over R12 billion a year, far higher than the tax paid upon retirement (see graph).
Unfortunately, the large number of withdrawals indicates that severe tax implications were not enough to minimise early withdrawals.
The growing amount of withdrawals reduces the amount available for employees on retirement, something that the two-pot system aims to address. It does this by allowing individuals some access to their retirement savings during times of difficulty without their having to resign. At the same time, the aim is to ensure that most of their retirement savings are off limits until retirement. The flexibility is meant to reduce households’ financial stress while improving long-term savings.
How the two-pot retirement system will work
From 1 September 2024, existing and new retirement contributions will be split into three components (pots):
1. A third of total retirement contributions (made after the implementation date) each year will go into the savings component. Funds in this pot will be accessible at any time without the need to resign. The only restrictions are that withdrawals must be a minimum of R2 000, can only be made once a year, and will be taxed at individuals’ marginal tax rate.
2. The remaining two-thirds of contributions from 1 September will go into the retirement component. Funds in this pot cannot be accessed until retirement.
3. All accumulated pension fund contributions made until 31 August 2024 will go into the vested component. Access to this pot is possible upon resignation or retirement. In addition, 10% of the value of this component (up to R30 000) will be transferred, once-off, to the savings pot on 1 September.
Possible economic impact of the two-pot system
The implementation of the two-pot system will provide some additional economic stimulus, with the magnitude depending on uptake of the available funds and how they are used. There are different estimates of the amount that could be withdrawn, ranging from R20 billion to R100 billion over 2024-25. We are assuming a relatively conservative withdrawal of R50 billion, which would equate to a R40 billion after-tax boost to consumers’ disposable income (assuming an average marginal tax rate of 20%).
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