The Congress of South African Trade Unions (Cosatu) is lobbying for “substantive” changes to the two-pot retirement system, including tax concessions for low-income members who withdraw money from their savings component.
In a submission to National Treasury and the South African Revenue Service (SARS), Cosatu also called for fund members to be allowed to transfer their accumulated (pre-two pot) savings to both their savings (accessible) component and their retirement (preservation) component.
The two-pot legislation allows members to transfer their accumulated retirement savings, as valued on 31 August 2024, from the vested component to the retirement component in the same fund. But they cannot transfer from the vested component to the savings component.
The only transfer permitted from the vested component to the savings component is the once-off seeding – the lower of 10% or R30 000 of a member’s retirement savings at the end of August 2024 – that is automatically performed by fund administrators.
Cosatu’s submission on the 2024 Draft Revenue Laws Amendment Bill (RLAB) also reminds Treasury that it previously agreed to amending the two-pot legislation so that retrenched members will be allowed to access their retirement component.
Currently, any pre-retirement access to the retirement component is strictly off-limits. The savings in this component can be accessed only when a member reaches retirement age, when the entire benefit must be used to buy an annuity.
Cosatu’s fourth proposal is that members be allowed to use their retirement savings as security for education loans – in the same way that the rules of some pension and provident funds permit their members to use their savings as collateral for home loans.
It asked for engagements on these “urgent matters” to begin with Treasury as “a matter of the highest priority”.
In a media statement, Cosatu expressed its “dismay” over the “excessive” fees it claims some administrators are charging to process savings component withdrawals.
Matthew Parks, Cosatu’s parliamentary co-ordinator, told Moonstone that the federation recognises that administrators need to cover the costs associated with withdrawals. With hindsight, however, he said Cosatu should have lobbied, when the legislation was being processed, for these fees to be regulated.
Cosatu will engage with Treasury on whether a mechanism can be found to set caps on administration fees.
Obtaining concessions
Cosatu, which is part of the Tripartite Alliance with the ANC and the South African Communist Party, has been partially successful in obtaining concessions from Treasury since the draft two-pot legislation was published for comment in 2022.
The original legislation did not provide for the savings component to be seeded via a transfer from the vested component. This was introduced following lobbying by organised labour, particularly Cosatu.
When Treasury relented and incorporated seeding into the legislation, it proposed the seeding to be 10% of a member’s accumulated (vested) benefit, with a cap of R25 000. Cosatu pushed for the cap to be R50 000. Following engagements with Treasury and the retirement industry, Cosatu compromised and agreed to a cap of R30 000.
Cosatu also pushed back on calls by the retirement industry to postpone the implementation of the two-pot system from 1 March 2024 to 1 March 2025. Treasury initially supported moving the implementation date to 1 March next year, but after stiff opposition from Cosatu, a compromise date of 1 September 2024 was agreed on.
Access to retirement component on retrenchment
Cosatu’s main priority is for the two-pot legislation to be amended early next year to enable members to access their retirement component if they are retrenched.
Currently, members of pension and provident funds can take a full cash benefit from their vested component if they are retrenched or dismissed, or if they resign. They can also make a withdrawal from their savings component.
In its submission, dated 26 August, Cosatu said it was unacceptable that workers who have lost their jobs are prevented from accessing what could be substantial savings in their retirement funds, thereby losing their homes or vehicles or not even being able to buy food or electricity. South Africa does not have a comprehensive social security net, and many workers struggle to access their Unemployment Insurance Fund benefits.
Treasury has already committed in principle to finding a mechanism whereby retrenched members will have access to their retirement component.
During a presentation to the National Assembly’s Standing Committee on Finance in September 2022, Treasury said the second round of the two-pot reforms would provide for limited income-based withdrawals from the retirement component on retrenchment only. During its presentation, Treasury proposed that the withdrawals will have conditions attached:
- Members must have depleted all their savings in their savings and vested pots;
- Members must have exhausted their Unemployment Insurance Fund benefits;
- Members will have to prove they have no other source of income; and
- Instead of withdrawing a lump sum, members will receive an annuity for a limited period, perhaps up to a year.
Since the above proposals were made two years ago, there have been further engagements with Treasury on the potential modalities of withdrawals on retrenchment, Parks said. He indicated that Cosatu is not in favour of stopping withdrawals while a fund member remains unemployed. One proposal is that members be permitted to withdraw the equivalent of their (last) monthly salary.
Cosatu initially called for members to have access to the retirement component on retrenchment or dismissal. Although its submission repeated this call, Parks said Cosatu does recognise that access on dismissal is more open to being abused – employees could engineer a dismissal so they can access their retirement component. On the other hand, because of the procedures in the Labour Relations Act, it is easier to verify whether a person was retrenched for legitimate reasons.
Transfers from the vested to the savings component
Cosatu is also proposing that members be allowed to transfer their savings from their vested component to their retirement and their savings components.
If members elect to make a transfer, the transferred amount should be split one-third to the savings component and two-thirds to the retirement component – in line with how members’ retirement fund contributions are split from 1 September.
For example, if a member has R300 000 in his vested component, he could decide to transfer R150 000 to the two new components, with R100 000 going to the retirement component and R50 000 to the savings component.
Comment: Effectively, this proposal would allow members to seed their savings component with up to one-third of their vested savings – and they could then withdraw all this money once it has been transferred. This seems to undermine the rationale behind the two-pot system, to boost the preservation of retirement savings.
But Parks told Moonstone that Cosatu believes its proposed change will enhance preservation. Currently, members of pension and provident funds can cash out all the savings in their vested component if they resign, and it is not uncommon for over-indebted workers to quit their jobs so they can access their retirement savings. In terms of Cosatu’s proposal, a one-third transfer from the vested component to the savings component must simultaneously be accompanied by a two-thirds transfer to the retirement (preservation) component.
Tax relief for low-income workers
Low-income workers are “aggrieved” that pre-retirement withdrawals from the savings component are taxed at their marginal tax rate, Cosatu said.
Most of the dissatisfaction is a result of workers who are below the tax threshold having to pay income tax because of a withdrawal, or where a withdrawal results in a worker being pushed into a higher tax bracket.
Cosatu said workers feel the government is “profiteering” from their misery and indebtedness caused by a stagnant economy, for which they are not responsible. The point of savings component withdrawals is so that workers can alleviate their indebtedness.
Although it recognises that Treasury cannot afford to forego tax revenue from withdrawals, Parks said Cosatu believes the taxation level for low-income members should be reviewed.
Cosatu is open to discussing ways in which tax relief can be provided to low-income members. Its submission proposes the following for consideration:
- No taxation on savings component withdrawals for members below the income tax threshold;
- Withdrawals by low- and middle-income members should not push them into the next tax bracket;
- The first withdrawal by low-income members should be tax-exempt;
- Withdrawals below R30 000 should be tax-exempt; and/or
- Low-income members should be taxed at a lower flat rate (for example, 10%) instead of at their marginal tax rate.
