Shameer Chothia, Principal Consultant at Momentum Consultants and Actuaries

Recent news headlines highlighting pensioner calls for tax-free retirement income reflect a deeply understandable human sentiment. Facing tax liabilities on a reduced income during one’s post-work years introduces severe pressure on household budgets. In a country where everyday living costs are escalating, the desire to remove any financial friction for retirees is completely valid.

However, examining the retirement ecosystem through an economic lens reveals why the taxing of pensions exists in the first place.

Our social contract

The reality is that a significant portion of our population reaches retirement age without formal savings or employee-backed income solutions. The taxes collected on retirement income play an important role in cross-subsidising the broader social security network, including state social grants like the South African Social Security Agency (SASSA), which sustain those who have been structurally excluded from formal wealth-building systems.

Giving up tax on retirement income entirely would remove a critically important revenue stream used to support financially vulnerable households. While taxation is inevitable, when structured correctly it acts as the glue holding our national social safety net together. Lower-income retirees who qualify for state support often receive SASSA benefits alongside their modest formal pensions, demonstrating how tax revenues revert directly back into society.

To understand why taxation at retirement feels so painful, it’s necessary to take a step back and evaluate how tax impacts a worker across three distinct phases of life.

Phase 1: Accumulation and the behavioural nudge

If the tax structure is designed to benefit long-term savers, why is there such a groundswell of frustration at retirement? The short answer is severe, immediate financial pressure. When a household is struggling to meet monthly expenses today, planning for age 65 feels like a luxury. It’s difficult for individuals to forego immediate disposable income for a future benefit they can’t visualise.

This is why mandatory employer participation and auto-enrolment are so necessary. Without auto-enrolment structures built into payroll systems that default employees into saving from day one, voluntary retirement savings will almost always be deferred in favour of immediate daily needs. Auto-enrolment acts as a necessary behavioural intervention, ensuring individuals harness decades of tax-deductible compounding they would otherwise miss out on if left to navigate the system alone.

Navigating the Two-Pot environment

The accumulation phase has evolved further with the introduction of the Two-Pot retirement system. Historically, the greatest threat to retirement security was complete cash-outs during job changes, which eroded both ultimate capital and lifetime tax-free allowances.

In our current Two-Pot environment, early withdrawals are once again in the spotlight. Accessing emergency funds offers immediate relief to distressed households, although withdrawing funds prematurely incurs marginal income tax penalties designed by government as a deliberate deterrent.

Compulsory preservation of the two-thirds retirement component creates an important safeguard, protecting members from capital depletion so that a foundational baseline.

Phase 2: Preservation and allowances at retirement

When a member reaches retirement age, the tax system offers substantial relief. Assuming an individual has consistently preserved their savings throughout their career, current legislation provides a tax-free lump-sum allowance of up to R550,000 at retirement.

When paired with professional financial advice, members can structure their income selections and retirement annuities to maximise this tax-free threshold, ensuring sustainable growth while minimising their ongoing tax liabilities. Tax at retirement is not an arbitrary penalty but rather a highly regulated structure that rewards long-term preservation.

Phase 3: Post-retirement reality and the advice gap

Once an individual retires and purchases an annuity, the regular income drawn is taxed according to standard personal income tax scales (PAYE). Because most retirees draw an income lower than their final working salary, they fall into significantly lower tax brackets. Furthermore, basic tax thresholds mean that lower-income retirees often pay very little to no income tax at all.

This brings us to the crucial role of financial advice. Many members simply do not understand the tax mechanics of retirement funding because they lack access to professional guidance. While the advice profession has historically faced trust challenges due to some bad practices by a minority of individuals, professional, certified advice remains the primary catalyst for better retirement outcomes.

As highlighted in recent research from the Bureau of Market Research (BMR), advice participation increases sharply as household income rises, leaving lower-to-middle income earners exposed.

• In households earning between R10,001 and R15,000 per month, only 5% of women and 4% of men consult a certified financial adviser.
• In the R15,001 to R25,000 per month bracket, uptake sits at 6,1% for women and 9,2% for men.
• It is only in the highest income band (R70,000+ per month) that participation reaches 15,8% for women and 20,8% for men.

This data reveals a systemic gap: the very households that need tax optimisation and long-term planning the most are the least likely to access certified advice, often leaving them unprepared for the tax realities of retirement.

Moving the conversation forward

The debate around taxing pensions should not centre on abolishing tax entirely as this would undermine broader societal support mechanisms. Instead, the focus must shift toward earlier engagement, structured employer benefits, and accessible financial advice.

When working South Africans are empowered to understand the lifecycle of tax – benefiting from deductions during their careers and leveraging allowances at retirement  tax ceases to be a surprise penalty. Instead, it becomes what it was designed to be: an engine for individual and collective financial resilience.

ENDS