From 1 September 2024, the two-pot system will provide a balanced solution by addressing retirement fund members’ needs for longer-term financial security and short-term financial relief.
We estimate that the two-pot system will likely improve new members’ retirement outcomes by 2 to 2.5 times compared to those under the current system, given the requirement to preserve their retirement pots fully before retirement. This change is important because the main reason for members not being able to afford to retire is because only 1 in 10 members preserve their retirement savings when changing jobs.
However, unexpectedly members may need access to cash for financial relief due to emergencies or unplanned expenses, such as medical costs or education fees. The changes will provide members with the option to take limited cash withdrawals (if they have more than R2 000 in their savings pot) before retirement without resigning from an employer. Members need to be aware of the tax consequences, as this can be significant.
Tax implications
The two-pot system provides:
• tax incentives to keep savings in the retirement fund until the date of retirement
• tax disincentives for taking savings out of the retirement fund before retirement
If an amount is withdrawn from the savings pot before retirement, an individual’s marginal tax rate will apply to the amount withdrawn. If a member waits until retirement to withdraw from the savings pot, then the retirement tax table applies and the first R550 000 is taxed at 0% making it tax-free. This is subject to previous amounts withdrawn before September 2024 or from the vested pot.
For most members, it is only worthwhile to withdraw from their savings pot in the event of an emergency and if they don’t have access to savings elsewhere.
Let’s take a look at the tax consequences of withdrawing from your savings pot before retirement.
Marginal tax rates for the tax year ending 28 February 2025:
|
18% |
for taxable income below R237 100 |
|
26% |
for taxable income above R237 100 |
|
31% |
for taxable income above R370 500 |
|
36% |
for taxable income above R512 800 |
|
39% |
for taxable income above R673 000 |
|
41% |
for taxable income above R857 900 |
|
45% |
for taxable income above R1 817 000 |
Illustrative examples:
|
Mpho’s scenario |
Thandi’s scenario |
||
|
|
||
|
The impact for Mpho: |
The impact for Thandi: |
||
|
|
|
|
|
|
Initial claim amount |
R4 000 |
Initial claim amount |
R16 000 |
|
Less processing fee |
R210 |
Less processing fee |
R380 |
|
Less tax [(R4 000 – R210) * 26%] |
R985 |
Less tax [(R16 000 – R380) * 39%] |
R6 092 |
|
Less outstanding tax owing to SARS (IT88) |
R0 |
Less outstanding tax owing to SARS (IT88) |
R2 300 |
|
Amount Mpho will receive after deductions |
R2 805 |
Amount Thandi will receive after deductions |
R7 228 |
Above amounts are rounded to the closest Rand.
As seen from these scenarios, the tax payment can significantly erode the amount paid to the members. Had Mpho and Thandi kept their savings invested in their retirement funds and only withdrawn them at retirement, no tax would have been payable on the withdrawal amounts up to R550 000. This is assuming they had not taken any lump sum withdrawals previously from their retirement funds before September 2024 or from the vested pot.
It's important to be aware of the tax that would be payable before withdrawing from your retirement fund. If you need help, speak to a financial advisor or tax consultant.
Other possible deductions
Fees related to the two-pot system, including savings pot withdrawals, may apply and will differ per administrator.
There is no right or wrong way for the fees to apply. What’s important is that the fee is fair, transparent, equitable and ensures that quality administration services are provided on a safe and sustainable basis.
In certain circumstances, you might have restricted access to your savings pot in part or in full due to amounts owed by you to third parties which is secured or payable by the fund. These may include housing loans, employer judgments or pending judgements, divorce and maintenance orders. Funds are obliged to restrict access to the savings pot if it could leave insufficient funds to pay these amounts owed to third parties. Details of the above can be obtained from your fund administrator.
We suggest that members save for emergencies separately instead of relying on their savings pot, which should only be used as a last resort. Members are likely to need cash lumpsums at retirement to meet their needs, such as moving to a new house, paying off debt or putting money aside for medical costs during retirement. So, it’s important not to deplete or use most of their savings pot before retirement. Members should seek financial advice from an authorised adviser to make sure that their decisions suit their needs.
The retirement system is complex and members will be able to make decisions confidently once they understand the consequences of their different options. This ultimately leads to better financial outcomes.
Get the latest issue of FAnews