BEWARE THE TAXMAN WHEN ACCESSING YOUR THREE-POT RETIREMENT SAVINGS!

The two-pot system is meant to support long-term retirement savings while offering flexibility to help fund members in financial distress.

- National Treasury

Two new ‘pots’ have been added to SA’s retirement system from 1 September 2024. This allows South Africans to access a portion of their retirement savings before retirement, without having to resign their jobs and withdraw all their savings, as before. Beware, however! There can be significant immediate and long-term tax implications to dipping into your savings! This is where we come in. Allow us to ensure that you and your employees understand the full tax consequences and possible alternatives before withdrawing retirement savings.

THE THREE POTS OF THE NEW RETIREMENT SYSTEM

With two new pots added to what used to be the one-pot South African retirement system, fund members can now access a portion of their retirement savings before retirement, while still preserving savings for retirement. There are, however, immediate and long-term tax and other implications that should be carefully considered!

	*BEFORE 1 September 2024*	*AFTER 1 September 2024*
Pot	The VESTED pot	The SAVINGS pot	The RETIREMENT pot
Contributions	Holds all retirement fund contributions made before 1 September 2024 (less 10%, maximum R30,000, moved to Savings pot (i.e. seed capital)).	Holds seed capital calculated at the end of August From 1 September, one-third of your contributions will go into this pot.	From 1 September, two-thirds of your contributions will go into this pot.
Rules	Existing rules continue to apply.	New rules apply.	New rules apply.
Pre-retirement withdrawal	Can only be accessed before retirement if you resign, in which case you can withdraw all the retirement savings. Pre-retirement withdrawals are taxed according to the retirement fund Withdrawal Benefit Tax Table.	Funds can be accessed before retirement. Only one withdrawal per tax year: minimum R2,000, no maximum. If no withdrawals are made, funds remain available and benefit from tax-free growth. Early withdrawals are considered income, and subject to income tax at your applicable marginal rate.	Funds cannot be accessed until retirement, not even if you resign from your job (exceptions: emigrating, ceasing SA tax residency, or if a non-resident’s work or visitor’s visa expires).
Withdrawals at retirement	Allowable withdrawals at retirement will be taxed according to the Retirement Fund Lump Sum Tax Table. Not only is the first R550,000 tax free, but the rates in this table are much more forgiving in general.	At retirement, can be added to the Retirement pot (tax-free) or be withdrawn in cash and taxed according to the Retirement Fund Lump Sum Tax Table. Not only is the first R550,000 tax free, but the rates in this table are much more forgiving in general.	The full value must be used to purchase an annuity at retirement.

TAX AND OTHER ISSUES

Withdrawing from any of the pots should be approached with caution. In addition to the fees that will be charged, and the potentially devastating impact on your eventual retirement savings, there are also tax implications that must be carefully considered.

It’s significantly more expensive from a tax perspective to withdraw retirement funds before retirement age (normally 55), because the Withdrawal Benefit Tax Table or Individual’s Tax Table will apply. Instead, waiting until retirement to access savings – when the Retirement Fund Lump Sum Benefits or Severance Benefits Tax Table applies – is a far better tax option.
Up to R550,000 drawn as a cash lump sum at retirement may be tax free. However, this R550,000 is a cumulative withdrawal total over your lifetime. That means this tax benefit could be eroded by pre-retirement withdrawals.
Transfers from the Vested and Savings pots into the Retirement pot are also tax-free.
Employer contributions are still treated as taxable fringe benefits.
Early withdrawals from your Savings pot are considered income and are subject to income tax as per the tax directive the fund manager will request from SARS. What’s more, any outstanding taxes you owe SARS will automatically be deducted if you make a withdrawal.

Depending on your annual income and the amount withdrawn, a pre-retirement withdrawal from your Savings pot – taxed at your individual marginal tax rate – could also push you into a higher tax bracket. This would mean paying more tax on all your income for the year. Here’s an example of the potential impact of withdrawing R80,000 from your Savings pot. Waiting until retirement age to withdraw the same amount could be tax-free.

Earnings and tax	Without R80,000 Savings pot withdrawal	With R80,000 Savings pot withdrawal
Annual taxable earnings	R300,000	R380,000
Marginal tax bracket	26%	31%
Annual tax payable	R59, 032	R80, 307
Difference		+R21,275

Source: SAICA

Hidden costs of early withdrawals
Your full retirement fund contribution (one-third Savings pot; two-thirds Retirement pot) is still tax deductible up to 27.5% of annual income, up to a maximum R350,000 per tax year. This remains one of the biggest tax breaks out there, but is effectively cancelled out by the tax payable on an early withdrawal. Early withdrawals also have another cost – the loss of tax-free growth that could have been earned on your savings. Continuing with the example above, if the R80,000 is not withdrawn, but instead left to grow at an average annual return of 10% for 25 years, the projected returns are R866,776 (equivalent to R201,958 in today’s terms assuming 6% inflation). This means you could lose tax-free growth of R121,958 by withdrawing just R80,000!

Help is at hand!
Understanding the tax and other implications of early retirement fund withdrawals in the short term and at retirement will help you to make better-informed financial decisions. Early retirement fund withdrawals are likely to be more expensive in tax and lost investment growth compared to other options such as overdraft facilities, credit cards or home loans.