Concerns around South Africa’s new retirement fund system

Old Mutual Personal Finance head of advice Lizl Budhram said the new two-pot retirement system that South Africa plans to adopt in March 2024 could provide good opportunities for investors to maximise their returns but comes with considerable risk.

Parliament’s Standing Committee on Finance recently agreed to introduce the two-pot pension system from 1 March 2024.

This new system will allow individuals to contribute one-third of their savings into an account that can be accessible at any time, while two-thirds must only become available at retirement.

PPS Investments’ institutional client specialist, Nkululeko Kunene, said the proposed two-pot retirement system that is set to be implemented in 2024 should be seen as a golden opportunity to bolster retirement savings.

However, Budhram explained that once someone reaches retirement, there is an amount in their fund that they can withdraw as a lump sum. 

“When we deal with clients who reach retirement, it’s usually very important to have access to that lump sum because often people then still have a bond or they still have debt that they would like to repay before they commence into their retirement years,” she said. 

However, “at the moment, we see if you withdraw money, there’s a table at which the withdrawal amount will be taxed that does penalise you at retirement”. 

Under the new system, the full withdrawal amount will be subject to a person’s marginal tax rate, which is the highest tax rate that applies to a portion – but not the entirety – of a person’s income, and there are no exempt amounts under the two-pot system.

“So, the tax implications can be really negative. It’s really important to understand that well before you finalise your decision to withdraw from your pension fund,” Budhram warned.

She added that the speed at which this system – which was originally planned for 2025 – is being implemented is a significant concern.

“A lot of work needs to happen to make sure everything is ready because we want to make sure that the right people can access their funds,” she explained.

“There will be tax calculations so people can make informed decisions. So, making sure that everything is ready and the system will work well is definitely a stress factor because we don’t have a lot of time with the current date.”


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