Retirement disappointment for wealthy South Africans

South Africans hoping for retirement reform in the 2025 Budget are likely to be disappointed, and wealthy South Africans are being hit especially hard.

Old Mutual Corporate’s chief customer officer, Michelle Acton, said the upcoming 2025 Budget Speech will be the first since the launch of the new two-pot retirement system in September 2024 and as a result, experts expect this to be an area of focus.

“We expect the focus will be on stabilising the two-pot system,” Acton said.

“While the government has signalled its commitment to auto-enrolment, which could significantly expand retirement savings coverage to South Africans who currently work but don’t contribute to a retirement fund, its execution will require careful consultation and collaboration before any further announcements will be made.”

However, Acton pointed out that there are other pressing concerns within South Africa’s retirement framework.

In particular, the unchanged R350,000 tax-deductible contribution cap has remained stagnant since 2016 and has not kept pace with inflation and salary growth.

“The retirement fund contribution cap refers to the maximum amount members can contribute to a retirement fund – pension, provident, or retirement annuity – tax-free,” Acton explained.

“While historically only higher earners have hit this limit, the introduction of the two-pot system may encourage more people to contribute, knowing they can access one-third of their savings in emergencies.”

“Raising the cap would allow those who can afford to save more to do so, improving long-term financial security while reducing reliance on government support in retirement.”

This means that high-income earners are increasingly facing a key decision when exceeding SARS’ R350,000 retirement tax-deductibility cap – continue contributing to a retirement fund or allocate excess savings to discretionary vehicles like tax-free savings accounts (TFSAs).

Old Mutual Corporate Consultants (OMCC) analysed this issue and found that while excess contributions are not tax-deductible, they still offer benefits.

Growth within the fund remains tax-free, and non-deductible contributions can reduce taxable income on lump sums or annuities at retirement.

However, the organisation explained that factors such as investment fees, offshore exposure, estate duty, and access to funds under the two-pot system should also be considered.

OMCC compared three savings approaches – saving excess contributions in a retirement fund, using a discretionary savings vehicle, and using a TFSA until the limit is reached, then a discretionary vehicle.

It found that for salaries around R2.5 million, the differences between options are minimal, with TFSAs offering slightly higher take-home pay.

At higher contribution levels – 20% of salary – saving excess in a retirement fund results in a 9% higher post-tax income than discretionary savings and 3% more than using a TFSA.

For salaries around R5 million, OMCC found that retirement fund contributions provide 15% more post-tax income than discretionary savings and 10% more than a TFSA.

Despite excess contributions not being tax-deductible, retirement funds generally provide superior post-tax retirement income, significant tax advantages, offshore investment opportunities, and, post-September 2024, partial access to funds under the two-pot system.

While TFSAs improve savings efficiency, they do not outperform excess retirement contributions.

Implications for businesses

It is not only wealthy or middle-class South Africans who would benefit from retirement reform, though.

According to OMCC MD Blessing Utete, broader policy measures are also needed to help businesses leverage employee benefits as a competitive advantage.

In this regard, he said that the budget speech could touch on several points that could impact retirement reform and workplace benefits.

In the first palace, he noted that further clarity is needed on NHI’s implementation and its impact on employer-sponsored healthcare benefits.

He noted that currently, businesses need much more clarity on the implications of private healthcare offerings with the national system.

Next, he explained that incentives for high-demand sectors are also an important area to watch.

“Tax breaks for industries such as technology, renewable energy, and manufacturing could enhance business competitiveness and job creation. Infrastructure investment could improve employment conditions and help attract skilled talent,” he said.

Finally, he noted that wages and cost-of-living relief are other important factors to look out for in the upcoming budget.

“Tax incentives or wage subsidies could assist businesses in funding salary increases and performance-based bonuses. Increased skills development funding would also strengthen workforce resilience and productivity.”

The 2025 National Budget presents a crucial chance for employers to enhance workforce financial security, Utete explained.

“Tax incentives for retirement savings and healthcare could drive greater employer investment in employee well-being and help businesses integrate these benefits effectively into their employee value proposition,” he said.

“As businesses grapple with ongoing economic challenges, the 2025 National Budget presents a crucial opportunity to strengthen retirement savings, improve employee benefits, and drive long-term financial security,” Acton added.

“Collaboration between government, employers, and industry stakeholders will be key to ensuring that policy refinements support both workforce well-being and economic growth.”