The long-awaited two-pot system of retirement reform takes effect on Monday, with expectations that pension members will withdraw billions of rand from their funds over the coming weeks and months.
Estimates of withdrawals in 2024 range between R20bn and R100bn, which is expected to give a boost to economic growth and tax revenue.
But already trade union federation Cosatu has made proposals to the National Treasury and SA Revenue Service (Sars) for further reforms, and deputy finance minister David Masondo said in a speech to the Cosatu central executive committee on Friday that the Treasury was willing to engage with the federation on these proposals.
Masondo warned that there were several hurdles that had to be overcome that may delay the eagerly awaited withdrawals.
The reforms, which took effect on September 1, have been years in the making and retirement fund administrators and trustees, the Financial Sector Conduct Authority (FSCA) and Sars have been hard at work for months preparing their systems for the introduction of the new regime, which will give workers the opportunity to withdraw money from their retirement funds without having to resign from their jobs.
In terms of the system, there will be three pots — a vested pot of accumulated savings up until the introduction of the new regime; a savings pot into which one-third of future contributions will be deposited; and a retirement pot into which two-thirds of contributions will be made and which will be available only on retirement.
On implementation of the system, the lower between 10% of the vested component and R30,000 is transferred to the savings pot and will be immediately available for withdrawal. Thereafter workers will be able to make one withdrawal per year from the savings pot with a minimum withdrawal of R2,000.
The funds contained in the “vested component” will be subject to the current retirement regime, including the ability to make one-off withdrawals and to access funds upon resignation.
In its submission to the Treasury and Sars, Cosatu details the further changes to the system it would like to see. These relate to taxation, retrenchments, larger withdrawal relief and education loans.
On taxation, the Cosatu pleads for taxation relief on withdrawals, especially for low-income workers. In terms of the law as it now stands, workers will pay marginal tax rates on withdrawals before retirement.
“Workers, in particular low-income workers, below the tax threshold, are deeply aggrieved at having to pay tax on pension withdrawals, in particular the one-off relief on September 1 and withdrawals from the savings pot,” the Cosatu submission says.
“Workers are angry at what they feel is government profiteering off their misery and indebtedness caused by a stagnant economy they are not responsible for.”
The federation proposes that there be no taxation on early withdrawals for workers below the income tax threshold; withdrawals by low- and middle-income workers should not push them into the next tax bracket; the first withdrawals by low-income workers should be tax-exempt; withdrawals below R30,000 should be tax-exempt; and/or low-income workers should be taxed at a lower rate as opposed to their personal income tax rate.
Treasury acting head of tax and financial sector policy Chris Axelson argued during a panel discussion on Friday that the two-pot system was not a scheme by the government to increase tax revenue. He noted that retirement fund withdrawals have been taxed cumulatively year after year, whereas under the two-pot system the tax would be linked to the income in the year of the withdrawal.
Cosatu argues that workers who lose their jobs, for example through retrenchment or dismissal, must be allowed to continue to access their entire pension funds.
“We cannot sustain a scenario where a worker has lost their job and despite having substantial funds saved in their pension funds would not be able to access it and would thus lose their homes, cars and other possessions and even to simply buy food or electricity,” Cosatu said.
Second phase
The Treasury has already indicated that it plans a second phase of retirement reform to allow retrenched workers access to some of their retirement funds without completely depleting the preservation pot. Without this change, workers would only have access to the full amount of the vested component and savings component of the two-pot regime when retrenched but not the retirement component.
Another proposal by the federation is for workers to be given the right to choose to transfer funds from their vested pot to the new two-pot regime. Transfers should be based on two-thirds going to the preservation pot and a third going to their savings pot. Workers should be allowed to choose how much to transfer from their vested rights pot to the new two-pot regime, along the two-thirds/one-third split.
“This would give workers more substantial relief, while boosting savings for retirement and simultaneously allowing workers to decide what best addresses their needs,” Cosatu argued. It said for many workers, the immediate relief of up to R30,000 was not enough to make a meaningful impact on their high levels of indebtedness.
Cosatu also wants workers to be allowed to use their pension funds for education loans or as collateral for home loans.
Cosatu parliamentary co-ordinator Matthew Parks expressed dismay that Sars plans to deduct arrear tax from pension fund withdrawals and that some pension funds planned to charge “excessive” administrative fees on them.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.