The South African government’s saving grace
The additional tax the government is set to collect from two-pot withdrawals is set to bolster its revenue and offset lower-than-expected collections in the first five months of the current financial year.
The two-pot system has been in effect since 1 September this year and aims to prevent South Africans from changing jobs to access their pensions in case of emergencies.
To discourage early withdrawal, higher tax rates are levied on lump sums taken out before retirement.
Under the two-pot system, withdrawals are taxed at marginal rates as they are classified as additional income during the year.
This is set to greatly boost the government’s personal income tax collection, with the National Treasury pencilling in an additional R5 billion in tax revenue from the new two-pot system.
However, Nedbank’s economics unit expects the total benefit to be much closer to R7.5 billion.
This estimate is based on calculations using the lowest tax bracket. If more individuals from higher tax brackets withdraw funds, then the total revenue boost could be higher than R10 billion.
In the first month of the new system, R21.4 billion was withdrawn, and while Nedbank expects this to slow in the coming months, it said withdrawals may spike during the festive season.
Overall, it is expected that around R40 billion will be withdrawn by the end of 2024. Nedbank economist Isaac Matshego said this is a conservative estimate and is likely to be revised higher based on the surge of withdrawals in the first month.
This will provide a revenue windfall for the government and enable it to offset declines in other revenue streams, particularly VAT.
Revenue from VAT is expected to be around R8.5 billion lower in the current financial year, and corporate income tax (CIT) revenue is also under pressure.
The windfall from the two-pot system should not only more than offset these declines but also boost VAT and CIT revenue, Matshego said.
This is because most of the money withdrawn from retirement funds is expected to be spent, resulting in more VAT collections and increased corporate profits.
Nedbank anticipates over R20 billion from two-pot withdrawals will be spent, while the rest may be used to pay down debt.
The expected impact of the two-pot system on government revenue can be seen in the graph below.

Government shooting itself in the foot
The two-pot system is also expected to boost the local economy, with increased consumer spending translating into stronger GDP growth.
Data from the Reserve Bank indicates that consumer spending could pick up by as much as 0.8% in 2024 and 1.8% in 2025 before reverting to the baseline.
This will have a positive economic impact, boosting GDP by 0.3% in 2024 and 0.7% in 2025. In turn, the government’s financial pressure will be eased through increased tax collection and a larger economy, reducing its debt-to-GDP ratio.
However, some economists have warned that this will be a classic case of short-term gain for long-term pain, with South African economic growth hamstrung by a declining savings pool.
Stanlib senior economist Ndivhuho Netshitenzhe said the increase in household consumption expenditure would likely be import-intensive, limiting the upside benefit to overall GDP.
Increased spending in the next year will be offset by declining savings and a smaller pool of capital to fund investments in South Africa.
South Africa already has one of the lowest savings rates in the world, with household savings reaching -0.9% as a share of disposable income in the first quarter of 2024.
The two-pot system has the potential to make this even worse as South Africans increasingly tap long-term savings for short-term spending.
A low savings rate implies a low investment rate unless foreign savings can be imported by running a current account deficit.
Two-pot withdrawals may also have another negative effect – higher inflation.
The Reserve Bank said the stronger demand created by increased spending will, in an environment of constrained supply, translate into higher inflation.
“The rise in inflation triggers a repo rate response, with the repo rate increasing by 0.6% and 0.9% in 2025 and 2026, respectively,” the bank said in its latest Monetary Policy Review.
This would be to prevent the inflation created by two-pot withdrawals and spending from becoming entrenched in the economy and increasing the cost of capital for companies and households.
Even in the moderate withdrawal scenario outlined by the bank, the repo rate is expected to rise by 0.2% and 0.4% in the coming two years.
“In both scenarios, the growth benefits are temporary, while the inflation impacts appear to linger.”
“While the two-pot retirement reform provides some short-term relief to consumers, there are potential downsides,” the Reserve Bank warned.
Should the withdrawal rates turn out to be higher than expected in these two scenarios, the rise in inflation would be substantial, potentially requiring a response from the bank.
If the Reserve Bank hikes interest rates again, this would undermine household consumption and corporate investment in the near to medium term, limiting economic growth.
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