The two-pot retirement withdrawal may seem like a lifeline but it could end up costing you a lot more at a vulnerable age.
Old Mutual has warned South Africans who are tempted to withdraw some of their savings from the two-pot system.
The company acknowledged that it can be tempting to look at those retirement savings that have been piling up for years and think about how much easier life would be if that cash were available.
The two-pot retirement system came into legislation on September 1, 2024.
The financial institution said that the two-pot retirement system will give you access to a small portion of these savings, but using retirement money to fix your immediate cash-flow problems could lead to a financially difficult old age.
John Manyike, head of financial education at Old Mutual said that there are millions of elderly South Africans who spend their retirement years wondering if their money will see them through to their last days.
Far too late, they have realised that short-term convenience can have harmful long-term penalties.
“The two-pot system consists of two portions. One-third of future savings will be credited to a savings pot, and the two-thirds’ contributions will be credited to a retirement pot,” he explained.
“All the money in the savings pot can be withdrawn before retirement, but only one withdrawal per tax year will be allowed,” Manyike added.
The money left that has not been withdrawn will be in the unspent savings pot and will be the member's lump sum at retirement.
The tax implications
“It may sound like a great solution, but tax will be payable on the withdrawn money. This tax will be equivalent to your normal tax rate. So, if you have a tax rate of 25%, the taxman will deduct this from the amount taken out. So, if you access R 10,000, SARS will want R 2,500.”
He also warned that some retirement funds would also charge administration fees.
Pat Ndaba, a lead engineer for the tax directive project under personal income tax at Sars said that the organisation required that you must be registered for income tax, and your tax affairs must be in order, meaning your returns must be up to date.
Ndaba said that there must be no debt owing that is due to Sars and you may use the “Lumpsum tax calculator” on eFiling to check the tax amount that could be deducted from your savings benefit.
Your fund could be negatively impacted
Manyike noted that South Africans should be aware that when money is taken out early from a fund it can impact the chances to benefit from potential fund growth, dividends, and interest that could be earned if the money stayed in the retirement account.
“If you saved R 20,000 for ten years instead of being moved from a fund, compound interest would make it worth about R 35,817 (For illustrative purposes for this calculation, an annual interest rate of 6% compounded annually was used),” Manyike explained.
Manyike also argued reducing retirement savings means that as inflation and everyday costs increase, the member will be faced with the reality that their retirement income is restricted and cannot keep pace with price changes.
Lastly, he advised that if a person withdraws too much from their retirement fund, they may have to work longer to try and earn some extra money so that they can enjoy the retirement lifestyle they want.
“Majority of South Africans will struggle to maintain the same standard of living when they retire, and this is the current reality before the two-pot system,” he noted.
It should be added that taking money out of a retirement account once a year as allowed can become a habit that is used to constantly sort out cash flow.
This could rapidly deplete the ‘savings pot’ and impact long-term financial security, Manyike said.
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