South Africa’s new two-pot retirement scheme was designed to give members some financial breathing room during tough times, without requiring them to resign to access their savings. In short, although it offers short-term financial relief, this withdrawal benefit should only be considered for emergencies and not change how you think about your retirement financial needs.
It is important to remember that accessing retirement funds early means you have less available at retirement and impacts your tax-free savings portion. It affects the ability of your retirement funds to benefit from compound interest and grow at a rate that will ensure you have enough to retire comfortably.
Although commonly referred to as the two-pot retirement system, from 1 September 2024, your retirement contributions were automatically divided into three pots:
- Savings pot – One-third of new contributions will go into the savings pot, and will be accessible before retirement, once a tax year, for emergencies. 10% of the market value of your account on 31 August 2024 was seeded from your vested pot, but was subject to a maximum of R30 000.
- Retirement pot – Two-thirds of new contributions will go into the retirement pot, and can’t be touched before retirement, except under exceptional conditions.
- Vested pot – Houses all your retirement savings up to 31 August 2024 and will stick to the existing rules and regulations.
Pension fund members are now allowed to withdraw from the savings pot of their Retirement funds. To apply, you will need to instruct your Fund so they can request the required tax directive from SARS. This means that only registered taxpayers can benefit from this new retirement scheme.
As contributions made to your retirement funds are not taxed, tax will be deducted from any amount withdrawn at the rate applicable to the individual’s taxable income. However, those intending to withdraw funds must ensure that they have no outstanding debt owing to SARS, as this will be deducted from the withdrawal amount.
Once a withdrawal amount has been decided on, which has a minimum of R2000, it will take up to 48 hours for SARS to issue the directive. Before a final amount is paid to the applicant, the pension fund will be informed to deduct any outstanding debt on behalf of SARS before the payout is made to the member. Remember that you can also only withdraw once a year, so choose the amount wisely.
A tax calculator is available on SARS e-Filing website to assist you with an illustrative amount of what you can expect as a payout. However, all relevant and accurate information must be provided to get a clear estimate of the payout.
The tax implications for pension fund members who earn below the tax threshold and then make a withdrawal from the savings pot will only be determined during the annual Filing Season when taxable income will be taxed at 18%. As the sum of the withdrawal will be added to your employment and other income, this could push you into a higher tax bracket, leaving you to have to pay more tax. Any over or under-deduction of tax from a savings-pot withdrawal will be settled in the taxpayer’s next assessment during the annual submission of their ITR12 return.
If a member chooses not to withdraw from their savings pot before retirement, the remaining funds will be taxed as a lump sum benefit upon retirement. These tax rates are generally lower than the marginal tax rates applied to withdrawals before retirement.
However, if you are already a pensioner or aged 55 and over as of 1 March 2021, who did not opt-in when contacted, you will not be eligible to apply for a savings pot withdrawal.
Existing members can still withdraw a cash lump sum of up to R550 000. However, this R550 000 is a cumulative withdrawal total over your lifetime, which means this tax benefit could be eroded by pre-retirement withdrawals.
To ensure you fully understand the tax and other implications of early retirement fund withdrawals in the short term and at retirement, seek professional advice by contacting us at Dirmeik Consulting.
