EXAMINING the two-pot retirement system, starting on September 1, reveals the necessity of great thought to grasp its goals, advantages, disadvantages, and who stands to benefit the most.
In his budget speech, Finance Minister Enoch Godongwana declared that withdrawals from retirement funds are projected to yield a R5 billion tax windfall for the government in the 2024/25 fiscal year, therefore alleviating fiscal difficulties.
The two-pot arrangement, however, begs questions about long-term financial security even if it is meant to inspire savings. Regular withdrawals could drastically lower the amount accessible for retirement, hence raising reliance on government support. These withdrawals’ compounding effect emphasises the need of giving such decisions much thought.
Head of advising services at Everest Wealth Riaan Grobler underlines the need of knowing the two-pot system, its alternatives, long-term effects, and tax ramifications.
“Consumers must now use the opportunity to inform themselves about how exactly the new system will work and consult their financial advisor about the possible risks that this system may pose for their retirement planning,” Grobler says.
Although the method might provide temporary respite, if improperly managed it could cause long-term financial suffering.
According to Grobler, statistics show that just over 6% of South Africans are likely to retire well, while most may depend on children, the government, or other income sources.
Grobler emphasises the need of knowing the new system, particularly for people thinking about withdrawals. He points out that the mechanism limits withdrawals to the savings pot, so preventing people from resigning merely to obtain their pension money.
There are also major tax consequences for South Africans planning to withdraw from the savings pot. Any sum taken out, Grobler says, will be added to taxable income for that year and taxed at the relevant marginal rate — between 18% and 45%.
For people in the highest tax rate, this means getting little over half of the withdrawal amount after taxes, and the SA Revenue Service (Sars) can also deduct any outstanding tax arrears. Before making a withdrawal, Sars has advised people to register for taxes or run the risk of having their application turned down.
Under the two-pot system, contributions to retirement funds remain untaxed until they are taken out, while funds taken out are liable to taxes at the applicable rate. Sars mandates pension fund members be tax-compliant, debt-free, and free of outstanding tax returns to help avoid delays.
Users of digital channels including the Sars MobiApp, eFiling system, or Sars Online Query System (SOQS) should register or validate their tax status. Once enrolled, the pension fund will ask Sars for a tax directive, which, should the taxpayer be compliant, will be provided within 48 hours showing the exact tax amount to be deducted.
Sars also underlined that people with current debt agreements with Sars will follow their terms and any outstanding tax debt will be automatically removed from the withdrawal amount. Before the August 30 deadline, pension fund managers are urged to run trading tests with Sars in order to guarantee a flawless transfer once the system starts running.
On its e-Filing system and website, Sars has supplied a tax calculator to let pension fund participants project their possible payouts. Those below the tax threshold will pay their taxes on withdrawals finalised during the yearly filing eason at 18%. The whole income — including the withdrawal — will define the final tax liability, therefore influencing the general tax rate.
Should members decide not to take from their savings pot prior to retirement, the remaining money will be taxed as a lump sum upon retirement, usually producing reduced tax rates relative to pre-retirement withdrawals.
These new rules highlight the need of being tax-compliant and educated as any overlook may have unanticipated financial results. Here we explore the repercussions:
Tax layout for withdrawals
- Savings component of the two-pot system will be taxed at member’s marginal tax rate. This is a clear shift from the previous arrangement, which charged early withdrawals at a reduced withdrawal tax table rate. Under the new method, for example, an R50 000 withdrawal might generate a tax of 26%, when under the old system the rate is significantly lower.
- Beginning a withdrawal, the retirement fund will ask Sars for a tax directive. This direction will decide the tax amount to be deducted from the withdrawal; once handled, the decision is final — that is, members cannot revoke the withdrawal once claimed.
- Any money taken out of the savings pot will be included to the member’s taxable income for the particular tax year. This can drive the member into a higher tax rate, therefore raising their overall tax burden.
- Although withdrawals from the savings pot will be taxed at the marginal rate, it is interesting that these withdrawals have no influence on the tax-free amount available in retirement. Tax-free at retirement, the first R550 000 of the entire lump payment will be taxed using the retirement fund lump sum tax table.
- Using the present withdrawal tax tables, which are usually more beneficial than the marginal tax rates applied to the savings pot, withdrawals from the vested pot — contributions made before the two-pot system — will continue to be taxed.
Vital issues
- Administrative expenses: Members should also be aware that fund administrators could incur expenses for handling withdrawals, therefore reducing the net total gained.
- Advice on financial planning: Individuals should consult financial advisers thinking through the likely long-term effects on retirement savings and larger tax ramifications before withdrawing from their retirement assets.
All things considered, the two-pot retirement system results in greater tax loads that could significantly affect the net amount earned by members even if it allows them wider access to retirement funds.