The highly anticipated two-pot retirement system came into effect on 1 September 2024. There has been significant activity across the retirement fund industry since then, both in terms of member engagement and withdrawal applications. Many members are still grappling with the decision of whether to access a portion of their retirement investment prior to retirement, and have questions about the rules and requirements. Carla Rossouw homes in on the tax implications and other important considerations.
Given the recent changes to the retirement funding system – which we discuss in depth in the two-pot retirement system info hub – you may have an available value in your savings component that you are allowed to access. However, before you submit a withdrawal instruction, consider the key points discussed in this article.
As a reminder, from 1 September 2024, your retirement fund contributions are split into a savings component (one-third) and a retirement component (two-thirds). All contributions made before 1 September plus growth thereon, less the seeding amount, are housed in a vested component. (Seeding was the once-off “funding” of your savings component – 10% of your accumulated retirement investment as at 31 August 2024, subject to a maximum of R30 000.)
1. You need to be registered with SARS. If you are not sure, you can check.
To withdraw from your savings component, you must be registered for tax with the South African Revenue Service (SARS). You can confirm whether you are registered via SARS’s digital and mobile channels – the SARS Online Query System (SOQS), SARS MobiApp and SARS eFiling.
If you are not registered for tax, you can register via eFiling on SARS’s website or on the SARS MobiApp.
2. You can withdraw the available amount in your savings component once per tax year – but this doesn’t mean you should. What is not withdrawn will be available in subsequent years.
There has been some confusion about how much you can withdraw from your savings component. The minimum withdrawal amount is R2 000, and you may withdraw up to the full value of your savings component if you need to, subject to one withdrawal per tax year for each of your retirement fund accounts. Withdrawals are not capped at R30 000; this was simply the maximum amount used as the opening balance of your savings component (seeding).
Your savings component will continue to grow over time as one-third of your contributions are added to it, and you earn investment returns on these contributions. If you choose not to withdraw in a particular tax year, you do not lose access to this money; the value in your savings component remains available for future withdrawals. However, the fact that you can access your savings component once per tax year does not mean you should. Withdrawing should not be viewed as an annual event that must happen.
… the value of your withdrawal could push you into a higher marginal tax bracket …
If you do decide to make a withdrawal, you should be prepared to receive less than the amount you request, since these withdrawals are taxed and potentially subject to outstanding taxes.
3. You will pay tax on your savings withdrawal benefit. You should check how much before you action a withdrawal as tax directives cannot be reversed.
Your savings component withdrawal benefit is considered part of your taxable income for that tax year and is taxed according to your marginal tax rate, as determined by the personal income tax table. The higher your income, the higher your marginal tax rate, which means that the value of your withdrawal could push you into a higher marginal tax bracket, resulting in a higher tax bill in that tax year.
When you submit a withdrawal instruction, your retirement fund administrator must apply for a tax directive from SARS. They will provide SARS with the amount you would like to withdraw, plus your estimated annual taxable income – although SARS may use other information they have on record to calculate the tax you owe. The tax directive received from SARS will indicate the amount of tax your fund administrator must withhold, which could include other debt you have with SARS. The after-tax amount will be paid to you.
We … strongly encourage you to use the SARS Two-Pot Retirement System Calculator to get an estimate of the tax that will be deducted from your withdrawal.
Once SARS has issued a tax directive, your withdrawal instruction cannot be cancelled; in other words, if you are unhappy with the after-tax amount you are due to receive, you cannot change your mind. We therefore strongly encourage you to use the SARS Two-Pot Retirement System Calculator to get an estimate of the tax that will be deducted from your withdrawal.
If you are uncertain about your tax compliance status, you can obtain a Statement of Account (SOA) from SARS via your eFiling profile. No debt deduction will be made from your savings component withdrawal if you have a payment arrangement with SARS, unless your payments are in arrears.
You will need to settle any under- or overdeduction of tax from a savings component withdrawal on assessment during the annual tax-filing season.
4. You will be taxed at your marginal tax rate – but why?
There has been no change to the tax treatment of retirement fund contributions under the two-pot system: Contributions are still tax-deductible (i.e. they reduce the amount of income on which tax is paid) up to 27.5% of the greater of a member’s annual taxable income or remuneration, subject to a maximum of R350 000 per tax year. In addition, all growth while invested in the retirement fund is tax-free.
The reason for this favourable tax treatment is to incentivise us to invest for our retirement. If a retirement fund member withdraws from their savings component before retirement, they are reducing their retirement provisions and, in principle, should not benefit from the tax deduction.
… you may wish to consult an independent financial adviser before submitting your withdrawal instruction.
Savings component withdrawals are therefore taxed at your marginal tax rate so that if you contribute to and withdraw from your retirement fund in the same tax year, you will be in a tax-neutral position, i.e. the same tax position as if you had never contributed the amount withdrawn.
5. Your pre-retirement savings component withdrawals do not reduce your tax-free withdrawal allowance at retirement.
Savings component withdrawals are not classified as retirement fund lump sum withdrawals for tax purposes. This means that they will not contribute to the lump sum withdrawal amounts you have taken either before or at retirement and will therefore not reduce the current R550 000 tax-free withdrawal amount available at retirement.
6. You pay less tax on savings component withdrawals at retirement.
If you choose not to withdraw from your savings component before retirement, the balance in this component can be withdrawn as cash at retirement or used to purchase a retirement income product. In addition, you may withdraw from your savings component at retirement even if you have already withdrawn during that tax year.
Any cash withdrawn at retirement will be taxed as a lump sum benefit according to the retirement fund lump sum tax table. These tax rates are generally lower than the marginal tax rates applied to withdrawals before retirement.
7. Withdrawing now could set you back significantly at retirement.
Although it is tempting to dip into the cookie jar, you should only make use of the allowable access if you have no other option and if not withdrawing would leave you worse off. Remember that any asset that is withdrawn and not replaced before retirement will reduce your income in retirement. Additionally, the longer you wait to replace the assets, the more you will have to invest to make up for lost time and investment returns.
Given the immediate tax consequences and long-term impact of early withdrawals, you may wish to consult an independent financial adviser before submitting your withdrawal instruction.