South Africans to get R40 billion boost next week

South Africans are expected to withdraw up to R50 billion from their retirement funds under the new two-pot system next month. 

However, after tax and administration fees, this will equate to around R40 billion cash-in-hand, which will significantly boost consumer spending and fill the government’s coffers. 

This is feedback from Stanlib’s senior economist, Ndivhuho Netshitenzhe, who said the short-term benefit of the two-pot system may be undone by its long-term problems. 

The two-pot system has been designed as a way to prevent South Africans from withdrawing their retirement savings prematurely. 

Under the old system, the only way South Africans could get their hands on their retirement savings was to resign or be retrenched. This created very poor outcomes for many in retirement. 

Netshitenzhe said that data shows, because of early withdrawals, only 6% of South Africans can retire comfortably. 

Between 2011 and 2020, over 6.1 million people opted for early pension fund withdrawal, with an average of around 700,000 withdrawals every year since 2016.

Higher tax rates on early withdrawals were simply not enough to discourage South Africans from getting their hands on their retirement savings prematurely. 

These taxes are a goldmine for the government, generating around R12 billion a year – more than the tax collected upon retirement. 

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.

The tax generated by the government on early withdrawals is shown in the graph below, courtesy of Stanlib. 

The government is not going to give up this valuable source of revenue up, with it set to collects billions more in early withdrawals under the two-pot system. 

From 1 September 2024, existing and new retirement contributions will be split into three components (pots) –

1. A third of total retirement contributions 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.

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, Netshitenzhe said.   

“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%).”

After administration fees, this could drop further to around R35 billion depending on how much asset managers levy on withdrawals. 

Unfortunately, this type of withdrawal will reduce savings in the short term. South Africa’s gross savings in the first quarter of 2024 represented only 12.7% of GDP, the lowest amount ever recorded.