National Treasury is open to discussions on allowing retirement fund members who are unemployed and in severe financial distress to access their retirement components. And it is not averse to the possibility of permitting members to transfer all their vested savings to their savings and retirement components.
However, Treasury is not willing to agree to using retirement savings as collateral for education loans, and it reiterated its view that it is fair for savings component withdrawals to be taxed at a member’s marginal rate.
Treasury outlined its position on possible changes to the two-pot retirement system during a meeting of the National Council of Provinces’ Select Committee on Finance on Tuesday morning.
The purpose of the meeting was to hear Treasury’s responses to comments on the 2025 Revenue Laws Amendment Bill (RLAB). The RLAB proposes changes to the Revenue Laws Amendment Act of 2024, which established the two-pot retirement system that came into effect on 1 September last year. The amendment Bill clarifies provisions related to how funds and administrators must implement the system.
Although the RLAB was the main item on the agenda, most of the meeting was devoted to discussing substantive changes to the two-pot system proposed by the Congress of South African Trade Unions.
The four proposals, which Cosatu put forward in September last year, concern the following:
- Access to the retirement component on retrenchment.
- Full transfer from the vested component to the savings and retirement components.
- Tax relief for low-income members who make savings benefit withdrawals.
- Using retirement savings to back education loans.
The two-pot system allocates retirement savings across three components (or pots):
- The vested component – savings accumulated by members who were in the retirement system before 1 September 2024.
- The retirement component. From 1 September 2024, two-thirds of contributions are allocated to this component. These savings (contributions plus investment growth) must be preserved until a member retires, when they must be used to buy an annuity.
- The savings component. From 1 September 2024, one-third of contributions are allocated to this component. Members can withdraw all the savings in the savings component once per tax year, subject to a minimum withdraw of R2 000.
When the two-pot system was introduced, funds or their administrators “seeded” the savings components of fund members who had vested savings. The lower of 10% or R30 000 of a member’s retirement savings at the end of August 2024 was transferred from the vested component to the savings component. The purpose of the seeding was to provide members who wanted to withdraw immediately with some money – they would not have to wait for their contributions to build up.
Cosatu’s position is that the two-pot system does not enable financially hard-pressed members to access enough of their savings before retirement, particularly when they are retrenched. A related issue is the negative impact of tax on withdrawals.
Access to the retirement component
Matthew Parks, Cosatu’s parliamentary co-ordinator, told the committee that members with vested components can withdraw all their savings if they are retrenched, but savings in the retirement component can be withdrawn only at retirement.
He said retrenched members face losing their (mortgaged) homes or (financed) vehicles, or being unable to pay for food or electricity, yet might have a large amount of money in their retirement components that they cannot access.
South Africa does not have a comprehensive social security system. Workers struggle to access their Unemployment Insurance Fund (UIF) benefits, and some workers are not covered by the UIF.
Parks said retrenched workers should have access to all their savings. Cosatu is open to discussions on the “modalities” of how this will work in practice. He suggested that instead of retrenched members being able to withdraw all their savings from the retirement component at once, they could receive a monthly annuity that will compensate them for lost income.
Alvinah Thela, National Treasury’s chief director for financial sector development, said Treasury stated in this year’s Budget Review that it is willing to initiate discussions on potential options to enable retrenched members to access their retirement components.
The Budget Review said strict conditions would apply to this access. They may include proof that an individual has no alternative source of income after a period, such as payments from the UIF, and limiting access to a percentage of income rather than a cash lump sum.
Chris Axelson, Treasury’s deputy director-general for tax and financial sector policy, told the committee that Treasury agrees in principle with Cosatu that ways must be explored that will enable members to access their retirement components when they have lost their job and cannot find another job immediately, and have used their savings component withdrawal, and have run out of UIF benefits.
“We don’t want to undermine the two-pot system completely. We are worried that if you allow anybody [to access their retirement component] who is retrenched, regardless of whether they get another job in a month, or whether they’ve got another job lined up, it could undermine the whole point of the two-pot system. And the point of the two-pot system was to say you can have some access at any time that you want, but the rest must be preserved into retirement to try and improve retirement outcomes. And if we roll back to allow too much access during a working period, it will undermine retirement outcomes at the end.
“But on the other hand, you don’t want individuals who are left with no assets, no income, potentially becoming destitute if they have hundreds of thousands [of rands] in a retirement pot that they can’t access. So that is what we need to try and figure out.
“From our perspective, there needs to be quite a few more conditions before access is granted. And if access is granted, it shouldn’t be to the full amount in the retirement pot. It should be a smaller amount that could then potentially be accessed in a few years, rather than in one go. So that is our thinking,” Axelson said.
Discussions need to be held with the retirement industry and other stakeholders, “and we need to work on a consultation period for that”.
In response, Parks said Cosatu is prepared to accept that members should first have to exhaust their savings and vested components and UIF benefits before being granted access to their retirement components.
Vested savings transfer
Parks said the seed amount of up to R30 000 was “a fair compromise to give some sort of comfort to workers” who did not have much in their savings components. But R30 000 less tax was not enough given many workers’ high levels of indebtedness.
Members should have the option to transfer all their savings from the vested component to the retirement and savings components, with two-thirds going into the retirement component and one-third into the savings component. Members can leave the savings in the retirement component until they retire or withdraw them if they are retrenched or dismissed.
Parks said this proposal is a fair compromise between boosting retirement savings and providing more meaningful debt relief while also discouraging members from resigning to access their vested savings.
Axelson said Treasury has not agreed to this proposal in principle, “but we are thinking about it. It’s a way to allow workers to potentially access a bit more, but also hopefully then preserve more for retirement.”
Treasury is “a little bit worried” about the impact on the liquidity of retirement funds.
When the two-pot system was introduced, Treasury was concerned that funds would have to sell assets to provide for the R30 000 seeding amount, resulting in asset prices falling.
“So, you don’t want to have this large market impact. And if you were to allow this in one go, it could potentially be much more than R30 000 per person that goes into it. So, those are our concerns, but it is something that we are considering, and it isn’t completely off the table,” Axelson said.
Thela said if members were to transfer whatever is in the vested component to the savings and retirement components, this would largely mean doing away with the vested component.
“It was one of the proposals we had put forward earlier when we started in the two-pot system, and we are willing to consider that.”
Thela said the challenge is that the two-pot system changed the retirement-savings system drastically, so any further changes need to be done in tranches. “We can’t now overhaul the entire system; that will take us back.” The proposal will require consultation and engagement.
Thela said permitting uncapped transfers from the vested component will result in members shifting large amounts of money to the savings component, so they can withdraw it.
Tax on savings component withdrawals
Parks said low-income workers are aggrieved about having to pay tax on savings component withdrawals, particularly because it effectively reduces the once-off seeding amount, which is supposed to provide immediate financial relief.
Another issue is that savings component withdrawals result in low-income members being pushed above the tax threshold or into a higher tax bracket.
He said Cosatu appreciated the fiscal constraints on the government, and reducing tax in one area will have a knock-on effect elsewhere. But middle- and low-income-earners are being squeezed by the rising cost of living and the personal income tax brackets not being adjusted for two years.
Cosatu’s proposals for providing tax relief on savings component withdrawals include:
- No tax on withdrawals for members who are below the income tax threshold.
- Ensuring that withdrawals by low- and middle-income members do not push them into the next tax bracket.
- Making the first withdrawal by low-income members tax-exempt.
- Making withdrawals up to R30 000 tax-exempt.
- Taxing low-income members at a lower flat rate (for example, 10%) instead of at their marginal tax rate.
Zalisile Ndzala, Treasury’s deputy director: legal tax design, said South Africa’s retirement-savings model provides that contributions to a fund, plus the investment growth within the fund, are tax-exempt. Tax applies only upon withdrawal. This model is designed to encourage long-term saving and the retention of contributions within the fund.
The tax system has mechanisms to protect low-income earners. Many low-income earners do not pay tax on withdrawals when they are below the tax threshold. About 6.5 million taxpayers who earn below the tax threshold are tax-exempt, Ndzala said.
Axelson acknowledged that many members are upset about being taxed on their withdrawals. But, as Cosatu pointed out, retirement fund contributions are deferred wages, and wages need to be taxed.
“There’s no tax going into the fund. There’s no tax within the fund. Tax has to be paid at some point.”
South Africa’s progressive system of taxation means that people who have lower incomes do not pay tax, or they pay much lower levels of tax than those on higher incomes. “If you have withdrawn from your savings pot, but you have got a lot of income that year, it is only fair that you should then pay tax in line with other people who have the same income,” Axelson said.
Education loans
Parks asked Treasury to consider allowing members to use their retirement savings as collateral for education loans, as they can for housing loans.
He said low-income workers cannot afford tertiary education fees. Many middle-income workers do not qualify for the National Student Financial Aid Scheme because they are above the threshold, which is an annual household income of R350 000.
Thela said Treasury rejected this proposal. The two-pot system enables fund members to make withdrawals from their savings components for expenses for which they cannot save or budget, which include education.
