As South Africa embraces a revamped retirement approach, the two-pot system offers both promises and challenges.
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2024 saw a shake-up of the South African retirement system with the implementation of the two-pot retirement system.
The implementation of two-pot retirement brought a lot of changes to South Africa's retirement system.
If you are unsure about the new retirement system works, here is a closer look.
As IOL previously reported, retirement savings were split into three different pots including the:
- Vested pot: all retirement contributions made before September 1, 2024 were in this pot.
- Savings pot: one third of all retirement contributions sits in this pot
- Retirement pot: two thirds of all retirement contributions goes to this pot.
Belinda Sullivan, Financial Services Head: Strategic Consulting at Alex Forbes, said that an example to illustrate how retirement contributions will be split under the new system.
If you are contributing R3,000 towards retirement, R150 can be deducted for fees, leaving a total contribution of R2,850. From this amount, R950 will go to the savings pot, while R1,900 will be allocated to the retirement pot.
Rita Cool, Head of Individual Consulting Strategy at Alex Forbes, explained that for a minimum withdrawal amount of R2,000, the anticipated tax is R720 (at a 36% tax rate), leaving R1,280 in cash after tax.
If the withdrawal amount was R30,000, the tax would have been R10,800 (also at 36%), resulting in an after-tax amount of R19,200.
This calculation did not take into account any transaction fees that a service provider might charge. The fee is deducted first and then the tax is calculated on the after fee amount.
Now that you know how the retirement contributions are split and how the withdrawals will be taxed, it is essential that you understand the tax implications of making a withdrawal.
Nashalin Portrag, Head of FundsAtWork and Distribution at Momentum Corporate, added that any arrear tax will be deducted by the South African Revenue Services (Sars) before any benefit is paid out from the savings component.
“Fund members need to be aware that before any payment will be released, the fund administrator will need to apply to Sars for a tax directive,” John-Paul Fraser, tax attorney, Tax Consulting SA.
“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,” said Fraser.
Withdrawals from the savings component will be taxed at marginal income tax rates, according to Portrag.
Fraser said that 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 to Sars.
Fraser noted that withdrawing from the savings pot can indeed push the taxpayer into a higher tax bracket.
“This is the case as the withdrawals from your savings pot are seen as income in the same light as that of remuneration income,” Fraser said.
According to Portrag, if a member makes a withdrawal from the savings component before they retire is added to their annual taxable income.
“If the member’s earnings prior to the withdrawal were on the upper end of a tax income bracket, it is possible the withdrawal amount being added to the annual earnings pushes the member into a new tax bracket,” Portrag said.
“If, however, the total annual income remains within a tax bracket, there will no change to the marginal tax rate applied despite making a withdrawal from the savings component.”
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