If you are considering dipping in to your retirement savings, you should do so wisely, warns Deputy Finance Minister, David Masondo.
From September 1, people will be able to borrow money from their retirements savings after President Cyril Ramaphosa signed into law the Revenue Laws Amendment Bill of 2023, essentially establishing a two-pot retirement system.
Masondo, has encouraged fund members to use their retirement savings wisely and only when there is a dire need.
He said with the new reforms, members will be able to withdraw up to a third of their retirement savings, while still preserving funds.
"They should seek trustworthy financial advice to consider the implications of withdrawing from their savings component," Masondo said.
He added that it is imperative that people understand that administration costs and tax at marginal rates will be deducted from such withdrawals.
"In addition, members will also lose out on all related future growth and the retirement benefit originally intended for those funds," Masondo said, addressing the Old Mutual Thought Leaders forum, emphasising the importance of financial literacy, financial education, and financial advice in this context.
According to National Treasury, the main intention of the two-pot system reform is to improve South Africa’s retirement outcomes for members at retirement through the preservation of a larger portion of the retirement savings.
National Treasury explained that the two-pot retirement system creates a more sustainable retirement fund system, while increasing flexibility to cater to the differing needs of members.
"The system will provide a welcomed relief mechanism for people in real crises to access emergency funds without resorting to loan sharks or having to quit their jobs to access their retirement savings, while ensuring a larger portion of those savings are preserved until retirement," it added.
Tax attorney at Tax Consulting SA, John Paul Fraser, urged fund members to consider the practical implications relating to their withdrawals from their savings pot, most importantly the tax implications.
He said an impulsive withdrawal without understanding the implications could lead to far more harm than the relief afforded by accessing those funds.
Five things to know about the two-pot system
Seed capital and withdrawal limits - On August 31, 2024, 10% of the value of your existing retirement fund, or R30 000, whichever is lower, will be allocated to your savings pot. This initial allocation of funds has been termed seeding capital.
Fraser said the seeding capital allocation is a once-off transfer at the commencement of the two-pot system and will not be repeated in the following years.
“The savings pot will be accessible at any time to a fund member with only one withdrawal permitted in a tax year. There is no maximum withdrawal amount set for fund members looking to withdraw from their savings pot but must be a minimum of R2,000,” he added.
Sars has the first right to your savings pot withdrawals - Fraser said fund members need to be aware that before any payment will be released, the fund administrator will need to apply to the South African Revenue Service for a tax directive.
“Where the taxpayer has an outstanding tax debt with Sars, the fund administrator will be issued with a notice to pay this debt from the withdrawal amount first and only pay the taxpayer the balance,” Fraser said.
Annual withdrawals are NOT limited to a single policy per tax year - Another dimension of the savings pot is that a fund member is permitted to make one annual withdrawal per policy. This incentivises the concept of having a more diverse policy portfolio.
“An example of this scenario is where an individual is contributing to three policies, the fund member would be eligible to make an annual withdrawal from each respective policy. Needless to say, a fund member will be limited to the actual amount that is held within their savings pot at the time of withdrawal,” Fraser explained.
Tax on savings - A withdrawal from a fund member's savings pot will be subject to tax at the fund member’s marginal tax rate. This means that any withdrawal will be taxed in the same manner as a salary or other similar income.
The tax on the withdrawals will be withheld by the respective fund administrator and paid directly over to Sars.
No resignation required - Fund members must be aware that the new system has limited their right to withdraw from their 2/3 retirement pot.
Fraser said previously fund members were permitted to access their total lump sum amount under their retirement policy upon a resignation. The new two-pot system thus implements a lock-in of the retirement pot until a fund member reaches retirement.
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