Carla Rossouw, Head of Tax at Allan Gray
South Africa’s two-pot retirement system, introduced on 1 September, divides all future contributions from retirement fund members into two components: a savings component and a retirement component.
“The aim of the new system is to preserve your retirement investment for its intended purpose, while offering you access to your savings component once per tax year in case of emergency,” comments Carla Rossouw, Head of Tax at Allan Gray. “But just because you can now access your savings once a year doesn’t mean you should.”
Rossouw encourages investors to understand the implications before withdrawing and outlines some other key considerations:
1. You need to be registered with SARS
“To withdraw from your savings component, you must be registered with SARS,” Rossouw states. To check, you can visit the SARS Online Query System (SOQS), SARS MobiApp and SARS eFiling.
2. You can withdraw the available amount in your savings component once per tax year
“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,” she says.
Withdrawals aren’t capped at R30,000. “This was simply the maximum amount used to ‘seed’ your savings component in the beginning so that you had an opening balance,” she explains.
3. You will pay tax on your savings withdrawal benefit
Withdrawals are taxed at your marginal tax rate, meaning higher-income earners face higher deductions. “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.”
She also emphasises that tax directives issued by SARS are final and can’t be reversed, so thorough planning is needed. “Using the SARS Two-Pot Retirement System Calculator will provide you with an estimate of the tax that will be deducted from your withdrawal,” she says.
4. Why are you taxed at the marginal tax rate?
“If a retirement fund member withdraws from their savings component before retirement, they are reducing their provision for retirement and, in principle, should not benefit from it.”
She says savings component withdrawals are 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.”
5. Your withdrawals don’t reduce your lump-sum amount at retirement
“Savings-component withdrawals aren’t classified as retirement fund lump-sum withdrawals for tax purposes,” clarifies Rossouw. “This means that it won’t reduce the R550,000 tax-free withdrawal amount available at retirement.”
6. You pay less tax on savings-component withdrawals at retirement
If you don’t withdraw before retirement, the balance in the savings component can be withdrawn as cash at retirement or used to purchase a retirement-income product. “Any cash withdrawn at retirement will be taxed as a lump-sum benefit. These tax rates are generally lower than the marginal tax rates applied to withdrawals before retirement,” she emphasises.
7. Withdrawing now could set you back significantly
Although it’s tempting to dip into the cookie jar, you should only make use of this facility if you have no other option. “Remember that any assets withdrawn and not replaced will reduce your income during retirement,” Rossouw highlights.
Given the immediate and long-term tax implications of early withdrawals, she suggests consulting an independent financial adviser before submitting your withdrawal instruction.
ENDS
