Tax revenue raised because of the introduction of the two-pot retirement system boosted the growth in personal income tax (PIT) collections by two percentage points in 2024/25, according to the South African Reserve Bank.
The SARB’s latest Quarterly Bulletin, which was published in June, includes an assessment of how the two-pot system has impacted retirement funds, the fiscus, and household consumption.
The two-pot system came into effect on 1 September 2024. By the end of October, tax revenue of R7.6 billion had been collected from withdrawals associated with the new system, higher than the originally projected R5bn for the remaining seven months of fiscal 2024/25.
The strong uptake continued in the subsequent months, with the cumulative tax revenue from retirement fund withdrawals reaching R11.3bn by the end of January 2025 and then surging to R12.9bn in March, the SARB said.
The additional R12.9bn in tax revenue raised through the introduction of the two-pot system boosted PIT collections from R720bn to R733bn and resulted in year-on-year growth in PIT of 12.6% in 2024/25 compared with 10.6% when excluding tax revenue from two-pot-related withdrawals.
The highest year-on-year increases in monthly PIT collections occurred in October 2024 (20.1%) and November 2024 (16.9%), reflecting increased collections related to withdrawals under the two-pot system.
PIT also benefited from above-inflation growth in collections in the finance and community services sectors, while the South African Revenue Service indicated there has been a noticeable improvement in pay-as-you-earn (PAYE) tax compliance over time.
The SARB said the implementation of the two-pot system enhanced SARS’s ability to recover outstanding tax debt. Of the PAYE collected through tax directives, R1bn was related to stop orders, which are automatic deductions that settle outstanding tax debts before any two-pot-related withdrawals are paid out.
Surge in withdrawals
Private and official retirement funds recorded a sharp increase in withdrawals (including retrenchment benefits and divorce settlements) following the introduction of the two-pot system.
Private funds are supervised by the Financial Sector Conduct Authority in terms of the Pension Funds Act. Official funds, such as the Government Employees Pension Fund, were established by their own statutes.
Total withdrawals increased by 19.4% from the second quarter of 2024 to the third quarter, when the two-system was introduced, to R47bn, and by a further 12.5%, to R52.9bn, in the fourth quarter of the year.
The implementation of the two-pot system has contributed to an increase in withdrawals and raised administration costs for retirement funds. This has adversely affected fund’s net income, which declined from R31.8bn in the second quarter of 2024 to R16bn in the third quarter, and even lower to R9bn in the fourth quarter.
“Ongoing high withdrawal claims and administration costs, related to managing two separate retirement pots and ensuring regulatory compliance, could continue to impact the net income of retirement funds in the near term.”
Balance sheets expand
Withdrawals reduce retirement funds’ immediate liability to members because the withdrawn benefit no longer form part of the funds’ inherent obligation. However, the balance sheet of retirement funds continued to expand in the third and fourth quarters of 2024, driven by movements in financial markets.
The balance sheet of retirement funds increased by 5.9% during the third quarter of 2024 as the FTSE/JSE All-Share and All Bond indices increased by 8.6% and 10.6%, respectively, and by a further 0.1% in the fourth quarter of 2024.
Changes in cash and deposits of the retirement funds during the three periods analysed were related to different factors. In the third quarter of 2024, cash and deposits increased in preparation to pay for the expected large withdrawals. This increase was subsequently reversed in the fourth quarter of 2024 after the payments were made, particularly for official retirement funds.
Effect on household consumption
Social benefits paid by retirement funds increased year on year by 14.2% and 19.4% in the third and fourth quarters of 2024, respectively. This partly reflected the increase in withdrawals of 26.5% and 45.5%, respectively, over the same period, mainly stemming from the implementation of the two-pot system.
Although households benefited from the proceeds of withdrawals under the two-pot system, the year-on-year increases in household consumption expenditure and disposable income were somewhat muted at 5.4% and 4.6%, respectively, in the third and fourth quarters of 2024, because the proceeds were primarily allocated across consumption expenditure, the repayment of debt, and the acquisition of assets.
In addition, the total amount withdrawn from retirement funds thus far is negligible relative to most national accounting aggregates, such as the nominal final consumption expenditure by households of R1.3 trillion recorded in the fourth quarter of 2024.
