Two-pot system: Immediate benefits must be weighed up against ...

As of 1 September, South Africa embarked on a significant shift in retirement planning with the introduction of the two-pot retirement system. This new structure allows retirement fund members to access a portion of their savings without the drastic step of resigning from their jobs. On the surface, this change offers flexibility and immediate financial relief for many. But beneath the surface lies a complex web of tax implications and potential long-term consequences that deserve a closer examination.

The promise of accessing retirement savings without leaving employment is undoubtedly attractive, especially in a difficult economic environment where immediate financial needs often outweigh future considerations. Yet, as the South African Revenue Service (Sars) has made abundantly clear, this flexibility comes with a cost. 

The taxman will take his dues, as Sars deputy commissioner Johnstone Makhubu emphasised during a recent SABC news broadcast: “The tax event occurs when withdrawals are made, either at retirement or upon resignation.” This stark reality raises critical questions about the real benefits of this new system for South Africans.

One of the most pressing concerns is the potential tax burden on withdrawals. The progressive tax rates, which start at 18% and can climb as high as 45% for those earning more than  R1.5 million annually, could significantly erode the funds that members withdraw. This is not merely a technical detail; it strikes at the heart of the system’s purported benefits. If a person withdraws their savings to cover an emergency or an unforeseen expense, how much of that money will they actually be able to use? And, more importantly, will this withdrawal end up doing more harm than good in the long run?

Chris Axelson, the treasury’s acting deputy director general of the tax and financial sector policy, attempted to address concerns about double taxation, saying: “The taxation on withdrawals is consistent with the current system,” underscoring that withdrawals before retirement have always been taxed. 

But the shift from the special tax table to taxing based on one’s marginal rate in the two-pot system adds a new layer of complexity. While it’s designed to dissuade unnecessary withdrawals, it also potentially punishes those who genuinely need their money.

Moreover, the system’s rigidity in processing withdrawals raises further questions. As Analise De Meillon-Muller, head of technical support at Glacier by Sanlam, clarified: “Once the tax directive has been applied for and the necessary deductions have been communicated, the process cannot be reversed.” 

This inflexibility could lead to regrettable decisions, especially for those who find themselves under pressure to withdraw funds without fully understanding the implications. Is it fair to lock individuals into a financial choice they cannot undo, especially in a system touted as providing flexibility?

The introduction of the two-pot retirement system reflects a broader trend towards increased individual responsibility in financial planning. But this shift also places the burden of complex decision-making on people, many of whom may not have the financial literacy required to navigate these waters. It’s here that we must ask: are we equipping South Africans with the knowledge and support needed to make these critical decisions, or are we setting them up for potential financial pitfalls?

Sars and financial institutions such as those represented by De Meillon-Muller have a responsibility to provide clear, accessible guidance to retirement fund members. 

But there remains a pressing need for public discussion on whether this system genuinely serves the best interests of the majority.

To truly make the two-pot system effective, we must go beyond simply implementing new regulations and consider the financial well-being of South Africans. This system, while promising flexibility, risks becoming a double-edged sword if not paired with robust financial education, thoughtful tax incentives and a commitment to protecting the long-term interests of retirement fund members. Without these measures, we risk creating a landscape where short-term relief comes at the expense of future security, perpetuating cycles of financial vulnerability rather than alleviating them. The question we must ask ourselves is, are we setting them up to sacrifice tomorrow’s stability for today’s needs?

The two-pot system presents possibilities, but it also comes with its own set of risks. The choices people make now can have serious, lasting effects on their future. That’s why it’s so important for everyone involved — the government, financial institution, and the public — in open and honest conversations about what this change means for the long term. After all, the decisions we make about retirement today will shape our lives and the lives of future generations.

Thabo Motshweni is a PhD student in the department of sociology at the University of Johannesburg.