Need for two-pot system has been there for too long

The two-pot system is a mechanism designed to help pension fund members access their pension savings. File photo

The two-pot system is a mechanism designed to help pension fund members access their pension savings. File photo

Published Jul 9, 2024


By Alude Xuba

The first day of September, 2024 will usher in a new era for a number of public service employees with the introduction and coming into effect of the new two-pot pension system. The two-pot system is a mechanism designed to help pension fund members access their pension savings in a two-way manner: by withdrawing 1/3 thereof at any time before retirement; and withdrawing the remaining portion thereof at retirement. The latter is what will eventually be retirement money.

The intention of the new two-pot retirement savings system in South Africa is to promote the preservation of retirement fund investments until members retire, while also allowing them access to a portion of their accumulated savings during their working years. Employees will be able to withdraw a small portion of their existing savings immediately once the two-pot system is implemented. This is called “seed capital”.

A member will be entitled to one withdrawal per tax year, and will be taxed as gross income at the marginal rate. Any amount accessed in cash as a savings withdrawal benefit will be taxed at your marginal income tax rate, which will depend on your taxable income for the tax year including the withdrawal amount. R2 000 will be the minimum amount an employee or member may withdraw. The seed capital will be limited to 10% of the amount in your retirement fund account on August 31, 2024 and subject to a maximum amount of R30 000. For you to have access to a withdrawal benefit of R30 000, the value of your retirement fund account on August 31, 2024 needs to be at least R300 000.

Over the years South Africa’s public service employees have seen pay increases that are inconsistent with the inflation and growth rate of the economy. They remain underpaid and heavily indebted. It was also part of the reasons why the National Credit Act was passed back in 2005 – in order to alleviate debt in the consumer and credit market.

Around 2014 and 2015, there was a strong false message making serious inroads within the public service labour market to the effect that as a result of the public fiscus’s over-indebtedness and corruption, there was a move to tap into the assets of public servants in the form of their pensions. I recall this period quite well because quite a handsome number of my relatives and close family members were victims of this false message.

Around this time there were strong calls for investment managers to amend the prescribed assets to include investment in public infrastructure. I sense this was the call that was incorrectly understood and created a lot of panic within the public service which led to resignations and exodus of public servants. However, a good number of public servants saw the opportunity of resigning as an opportunity to relieve them of the indebtedness they found themselves in. When they resigned, they cashed in their pensions and paid off existing and crucial debt obligations such as mortgage bonds, school fees, and credit cards. Some spouses even went as far as filing for divorce so they could cash out on their pensions.

The divorce would be a fabricated or made-up divorce so that one or both spouses could cash out on their hard-earned pension money to pay off their debt. The introduction of the two-pot system was long coming and championed by various labour formations and organisations. Had the two-pot system been implemented a while ago, it would have contributed hugely to under-indebtedness and a credit-healthy society. The public service would still have in its employ some top employees.

The social services purse would not be as bloated and overloaded. It still makes no sense to me why it had to take so long and so much effort to amend the applicable legislation and rules, when the dire need for the amendment, and two-pot system have been there for far too long.

On the other hand, it will be important to see the socio-economic impact the two pot system will have. Financial institutions and credit bureaus will have to collect data very closely to see what the pattern will be with regard to debt repayment and basic cash management. What remains unclear is what happens to the pension beneficiaries in the case of an early withdrawal of the money? Will they be entitled to their proportional share in the money or is their entitlement limited to the pension sum – that is the amount left following the first cash out?

* Xuba is a practising attorney.