By Brett Ladouce
During the presentation of his budget speech on 21 February 2024, our Minister of Finance, Enoch Godongwana, indicated that the government is expected to earn R5 billion in personal income tax by 28 February 2025 due to withdrawals that retirement fund members will make from their Savings Pots that will only come into existence on 1 September 2024 as part of the Two Pot System.
If we assume an average tax rate of 20% and an average withdrawal of R15 000 (only R12 000 after tax) per member, it will mean that at least 1 666 666 fund members are expected to withdraw at least R25 billion from their retirement funds. The actual numbers might be significantly higher if we take into consideration that there are, in my estimation, more than 10 million active fund members in South Africa.
Any believer in conspiracy theories might argue that the reasons for the introduction of the Two Pot System were to give government access to a new tax income stream relating to active fund members while at the same time limiting the tax loss of a potential R550 000 tax-free lump sum retirement benefit. In contrast to this theory, our government clearly communicated the reasons behind the Two Pot System.
Firstly, the Two Pot System will be implemented to improve retirement outcomes. A statistic that is quoted frequently in the financial industry is that only 6% of fund members will be able to retire comfortably. This means that 94% of fund members are at risk of not having enough money at retirement to sustain themselves after retirement without assistance from our government or their family members. The structure of retirement savings vehicles therefore had to be changed to limit the outflow of retirement savings when fund members change jobs.
Secondly, the Two Pot System was designed to create an accessible pool of money for members who are facing severe financial difficulties. During the Covid-19 pandemic, it became clear to the government that most South Africans have not made provision for an emergency fund that could be accessed in a time of crisis. South Africans had to be enticed to create emergency funds and it seems that the best enticement would be to provide a vehicle with tax incentives. Instead of creating a tax-free investment vehicle for emergency savings where pre-tax money could be saved for emergency situations, the government decided to use the existing retirement savings structures to create an emergency fund within a retirement fund, namely the Savings Pot.
The Savings Pot was therefore created to allow fund members to build up a pool of money that could be accessed in a crisis situation similar to Covid-19. It was not created as a solution to solve your short-term cash flow problems or to save you from the self-inflicted wounds caused by high interest credit purchases. Put differently, the Savings Pot is an airbag on a car that is deployed, hopefully, only once, in the case of an accident, as opposed to a spare wheel that might have to be used much more frequently over the lifetime of a car.
The sad truth is that we all have to take responsibility for the creation of our own emergency funds (“spare wheels”) that will cater for any financial crisis that falls short of a catastrophic financial event (“car accident”). A generally accepted target is to build up an emergency fund that will cater for your living expenses for at least three months. In my opinion, (but your financial adviser will be in the best position to assist you to determine) the most suitable investment options would be low risk investment vehicles that takes advantage of the R23 800 tax-free interest income you can earn annually and will include the following:
Retail Government Bonds. Government bonds are generally accepted as the lowest risk investment option. The RSA Top Up Bond interest rate is currently 9% per annum while a five-year fixed rate bond offers 10.75% per annum.
Fixed Term Bank Deposits. For investment periods of up to one year, banks offer between 7% and 10.5% per annum depending on the investment period.
Money Market Funds. The investment return can range between about 8% to 10% per annum based on the investment period.
Early access to your retirement savings is a privilege that is to be used only in extreme situations where there are no other options available to you to deal with a catastrophic financial event. With the right financial planning and savings discipline in place, you will hopefully never have to deploy your Savings Pot airbag while you are an active retirement fund member.
* Ladouce is a pension funds lawyer and the author of the book, Pensions for Palookas.
PERSONAL FINANCE