Retirement tax warning for South Africans
One year after the launch of South Africa’s two-pot retirement system, many people are using their savings pots to deal with financial pressure.
However, Vickie Lange, Head of Corporate Best Practice at Alexforbes, warned that these withdrawals come with hidden tax risks that could cause problems later.
The system, which came into effect on 1 September 2024, was designed to give retirement fund members some access to their savings while making sure that most of the money stays preserved for retirement.
One-third of monthly contributions go into a savings pot, which allows for emergency withdrawals. The other two-thirds go into the retirement pot, which cannot be touched until retirement.
Over the past year, South Africans have withdrawn more than R9.5 billion from their savings pots, mainly to pay off debt or cover basic living costs.
Lange said this shows the tough financial environment South Africans are in, but warned that withdrawals have a double cost.
“At a high level, it reduces the retirement income that someone would get in the future,” she explained.
“Anyone who has depleted their savings pot by the time they get to retirement can’t access any cash from their retirement pot.”
However, the main issue is that many South Africans who withdraw don’t realise that it can push them into a higher tax bracket, which could lead to more debt to SARS at the end of the tax year.
Lange explained that withdrawals are taxed at a person’s normal income tax rate. This means the withdrawal is added to your other income for the year, which can push you into a higher tax bracket.
“Withdrawals from retirement funds can push people into higher tax brackets. That could come as a bit of a nasty surprise for someone doing their tax assessment at the end of the year.”
For households already struggling with debt and rising costs, this can mean the money taken out gives less relief than expected after tax.
“For someone struggling financially, that could mean less relief than anticipated, and a shock when SARS issues assessments,” Lange warned.
SARS payday
The tax hit has also been bigger than the government expected. SARS initially forecasted to collect R5 billion in extra tax from two-pot withdrawals during the 2024/25 financial year.
However, by the end of February 2025, collections had reached R12.9 billion, more than double the estimate.
Lange said the problem goes beyond just the money lost to taxes. People who repeatedly dip into their savings pots will face even bigger challenges later.
“If people don’t have backup plans, and they’re using their savings pots, they’re going to run into a challenge at the point of retirement,” she said.
Lower retirement savings combined with higher taxes now could leave them with far less than they expect when they eventually stop working.
She added that it is important for people to think carefully before withdrawing. “These things are complicated. Not everybody will understand all the consequences, and that’s perfectly understandable,” she said.
“It’s good to go and just get some advice before making decisions on what to do with the money.”
According to Lange, most people using their savings pots are doing so out of necessity rather than choice.
“80% of respondents in our member survey said they’re using their savings part withdrawals to cover debts and essential living expenses,” she explained.
“People are obviously in a bit of a financial crunch, needing to access that money and needing to do so more than once.”
But she stressed that every withdrawal chips away at long-term financial security and may come with an unexpected tax bill.
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