An international comparison of the tax treatment of South African retirement funds

Abstract

The South African retirement system has undergone multiple changes over the past few years and in September 2024, South Africa implemented the two-pot retirement system. This meant that individuals under the retirement age will now be able to access a portion of their retirement savings throughout their working years for emergencies and will no longer only be able to access their retirement savings by simply resigning. This was the most significant change in the retirement system that provided individuals with flexibility which was necessitated by the need to immediate access to cash. Previously this led to individuals resigning from their employment in order to access their retirement savings which ended up being depleted before their actual retirement if they do not reinvest some of the funds or contribute to alternative retirement instruments or funds. The study examines the research problem relating to the lack of knowledge by ordinary residents of the income tax implications of retirement funds either at retirement, resignation, death, or early access to the retirement funds. The aim of the study was to investigate the income tax implications of funds received at early access, retirement, resignation and benchmark these against the tax treatments of Australia, Canada, UK and the USA. The study provides a comprehensive evaluation and analysis by examining tax implications at critical points of the retirement fund lifecycle across all selected countries. The study employed a qualitative approach that focused on a comprehensive literature review. Sources reviewed as part of the literature review included tax acts, publications on international retirement systems and other sources. The study revealed that various governments have a compulsory government backed retirement fund that is government sponsored and funded by employee's contributions and other voluntary plans to supplement their retirement savings. The study also found that the South African retirement system is comparable to the selected countries due to the fact that they follow similar tax approaches on certain aspects of retirement funds. Based on the analysis and comparison, recommendations were proposed on how the South African retirement system can be made fairer and more effective and suggestions on further areas of study on this topic have been made. The findings of this study will provide insights to public by clarifying the tax implications associated with retirement funds to allow them to make an informed decision regarding their retirement planning and possible move to other countries. The recommendations will provide policy makers with insight on how the South African retirement system can be amended to align it more closely to the system of the selected developed countries which ultimately benefits the individuals.