Two-pot retirement system: beware of the tax man

While many consumers cannot wait for the two-pot retirement system to be implemented on 1 September this year to give them access to a third of their retirement savings, they have to keep in mind that their withdrawals will affect how much they save in the end and remember that they will pay tax on it.

The new rules applicable to retirement funds will require all future contributions made to retirement funds, to be split into two portions: two-thirds of your contribution will be allocated to a retirement component which must be preserved until you retire, while the remaining one third will be allocated to a savings component.

Pension fund members will be able to withdraw from the savings component once per tax year before retirement. The withdrawal amount will be limited to the value in the savings component at the date of withdrawal.

The main idea behind this new system is to promote the preservation of retirement fund savings until retirement, while also providing retirement fund members with some access to their savings in times of need before they reach their retirement age, Jaya Leibowitz, senior legal adviser in the Retail Legal team at Allan Gray, says.

However, she warns that while access to your savings withdrawal benefit per year may come as a welcome relief for many people who genuinely need it, you should rather use or set up a separate emergency fund for this purpose if you can and preserve your retirement investment for its intended purpose: to provide you with an income in retirement.

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Tax man will take his share for Sars

If you do decide to use your savings withdrawal benefit, the first thing to remember is that you will pay tax on it. Leibowitz says a savings withdrawal benefit will be included in your gross income for the tax year.

“This means that the amount withdrawn will be taxed at your marginal tax rate. If you are unemployed and have no income in the year of the withdrawal, you will be able to withdraw up to R95 750 from your savings component tax-free (this is the tax threshold for South African tax residents under the age of 65).”

The maximum amount available for a savings withdrawal benefit will be the amount that has accumulated in the savings component (contributions plus growth, less any costs) at the date of the withdrawal.

“However, if you are earning, it is important to understand that because it is included in your gross income, the withdrawal amount could push you into a higher tax bracket. This tax treatment aims to discourage individuals from accessing a savings withdrawal benefit when they have other sources of income and do not really need to dip into their retirement fund savings.”

Leibowitz uses the example of Sally: she is 35 and work full-time, earning a taxable income of R370 000. Based on the 2024/2025 income tax table below, her tax liability will amount to R59 997 (R42 678 + 26% of the amount above R237 100, with a primary rebate of R17 235).

If Sally decides to access a savings withdrawal benefit of R25 000, she will be pushed into a higher tax bracket and will be liable for tax of R67 722 (R77 362 + 31% of the amount above R370 500, with a primary rebate of R17 235).

You will also pay for withdrawing by having less to retire on

The second thing to remember is the long-term impact of accessing your savings withdrawal benefit. Leibowitz says accessing a savings withdrawal benefit at any time before retirement may have a far bigger impact than you realise.

“If you are young, you may think that you will have plenty of time to save the amount that you have withdrawn, but not preserving that investment will cost you more than you may think as you will miss out on the power of compounding.”

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Often referred to as the “eighth wonder of the world”, compounding means you earn returns today on the returns you earned yesterday, over and above the amounts of money you contribute.

She says if, for example, you plan to retire at the age of 65 and decide to take a savings withdrawal benefit of R50 000 at the age of 35 to spend on a holiday or a few months of fun, you could lose out on up to R870 000 that would have been used to provide you with an income during retirement. . (Total investment growth assumed is 10% per year for 30 years with inflation at 6% plus 4% and the investment is assumed to grow at a steady rate; no volatility is considered.)

“That is a big difference,” she says.

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Rather start an emergency fund

Despite this, Leibowitz says there may be urgent reasons why a member of a retirement fund who does not have an emergency fund may need to access a savings withdrawal benefit, such as paying for medical expenses, pay off outstanding debt or fund basic living costs during a time of unemployment.

But before going ahead with a withdrawal, she says ask these questions first and talk to an independent financial adviser:

• Do you really need the withdrawal amount to pay for something important? If your answer is yes, do you need the full amount or can you reduce it?
• What is your marginal tax rate likely to be in the year of the withdrawal and how can the withdrawal amount impact your overall tax liability?
• How much tax are you likely to pay on the withdrawal itself?
• How is the withdrawal likely to impact your long-term savings towards retirement?

“Wherever possible, retirement fund members should avoid accessing their savings withdrawal benefit. If you have another source of capital and/or income and do not have essential expenses that you would not otherwise be able to afford, always maintain your investment in your retirement fund.”

Leibowitz says staying the course will significantly impact the amount of money you will have to provide you with an income during your retirement.