If National Treasury is serious about encouraging retirement savings in South Africa – they should increase the tax-free retirement contribution from the current R350 000 per annum to R500 000 per annum, in line with the tax-free R500 000 withdrawal amount at retirement.
Currently, South Africans (both employer and employee contributions) can contribute up to R350 000 per annum towards their retirement without attracting tax – which is not sufficient for a country that has an exceptionally low savings rate compared with its emerging markets peers.
National Treasury is concerned about the current policy design of retirement funds, whereby there is insufficient preservation of retirement funds before retirement; and individuals in financial distress can access all their retirement funds upon resignation, and hence are left with extremely low, if any, savings when they retire.
To be more precise one of their concerns is that individuals with a pension fund or provident fund can withdraw the full value of their pension or provident fund when they resign or retrenched from employment.
In addition, they are concerned that even if an individual transfers their pension or provident fund upon resignation to a pension preservation fund or provident preservation fund, they are still allowed a 100% once-off withdrawal at any time before retirement.
National Treasury estimates that around R78 billion is taken out of the retirement system through withdrawals made before retirement each year (contributions to retirement funds in the IRP5 data total R246 billion each year).
This large leakage reduces funds available for employees in retirement, contributing to low replacement rates.
The challenge is that while it is reported that the South African retirement funding sector, with assets in excess of R4.26-trillion, has the fifth highest assets-to-gross domestic product ratio in the world, less than 10% of retirement fund members can maintain their standard of living when they stop working, and 41% of economically active South Africans have not made any provision for their retirement.
According to SARS’ IRP5 certificate data, in 2017/18 in terms of contributions, a total of R246 billion was contributed into a pension fund, provident fund, or retirement annuity fund. Employers made the largest contributions to pension funds, at close to R100 billion, with R53 billion in contributions by employees. Provident fund employer contributions were around R44 billion with employee contributions at R19 billion. Retirement annuity fund contributions were around R32 billion.
Lesser contributions by employees have always happened, but the Covid-19 pandemic exacerbated the situation by pushing the issue of South Africans not saving enough for their retirement, into sharp focus.
We need to find ways of encouraging people with retirement funds to increase their tax-free contributions up to at least R500 000 if we are going to help retirement fund contributors live their lives comfortably, being able to sustain themselves and their families.
To mitigate against continued and further spread of Covid-19, if you recall, lockdown was imposed with level 5 being the extreme, with no movement allowed and all business had to shut down except for essential services.
It was during this period where we all witnessed many employed people rushing to access their retirement funds after being retrenched, while others decided to leave their jobs due to liquidations, downsizing and businesses closing.
People were desperate to access money from their retirement savings. Those that managed to get their retirement savings unfortunately helped drastically to reduce the amount of retirement savings overall in the country.
Because of the low culture of savings in this country, people had no other option but to tap into their retirement funds much earlier than they should have.
We ought to measure the success of a retirement policy system by whether members of retirement funds (employees) are able to retire comfortably once they exit their jobs.
While government imposes a substantial tax on withdrawals made before retirement as a deterrent for people attempting to cash in their hard-earned money before retirement, this does not appear to be working as there continues to be large numbers of withdrawals.
Based on the above trends and unforeseen circumstances, to avoid further reduction in retirement savings of individuals, we are proposing a change on the current policy design of retirement funds.
There should be an increase in the tax-free retirement contribution from the current R350 000 per annum to R500 000 per annum in line with the tax-free R500 000 withdrawal amount at retirement.
By giving the opportunity to people to save more for retirement, government will lessen its dependency on the fiscus and less people on the country’s social security system.
Currently government is double-taxing retirement savers – at contribution and withdrawal stage – leaving savers with less at retirement.
It is hoped that with more money at retirement, people will invest in the economy by starting small business and investing in start-ups to grow their investment portfolio. This is critical toward cultivating a venture capitalist culture and entrepreneurship in a country ravaged by massive unemployment and stagnant economic growth.
Jack Malebana is managing director of Akani Retirement Fund Administrators.