The new two-pot retirement system – which National Treasury intends to launch on 1 March 2025 – will let South Africans access some of their investment in an emergency, but an expert at Allan Gray warns against this new benefit.
Under the new system, all future contributions made to retirement funds, including retirement annuity funds and umbrella funds, are to be split into two portions: two-thirds of your contribution will be allocated to a retirement component, which must be preserved until you retire, while the remaining one-third will be allocated to a savings component, from which you will be able to withdraw once per tax year before your retirement.
The new system aims to encourage the preservation of retirement fund savings until retirement while giving members access to their funds in times of need before retirement age.
The main idea is to strike a balance between preservation and accessibility, ensuring retirement funds remain intact and secure while also providing support during unforeseen circumstances.
Jaya Leibowitz, senior legal adviser at Allan Gray, noted that the amendments to legislation require that, when the new system is implemented, a portion of the savings in a member’s existing retirement fund account, amounting to the lesser of 10% or R25 000 (National Treasury has proposed that this be increased to R30 000), must be allocated to their savings component.
This means that existing members who need access to cash will be able to access a savings withdrawal benefit shortly after implementation, she added.
However, Leibowitz warned that this new benefit is a dangerous route to take and outlined the immediate and long-term impact of accessing a savings withdrawal benefit – which are explained below.
In terms of the current draft of the new legislation, a savings withdrawal benefit will be included in the member’s gross income for the tax year in which that benefit was accessed.
This means the amount withdrawn will be taxed at the member’s marginal tax rate. If you are unemployed and have no income in the year of the withdrawal, you would be able to withdraw up to R95,750 from your savings component tax-free (this is the tax threshold for South African tax residents under the age of 65), explained Leibowitz.
The maximum amount available for a savings withdrawal benefit will be the amount accumulated in the savings component (contributions plus growth, less any costs) at the withdrawal date.
However, if you are earning, it is important to understand that because it is included in gross income, the withdrawal amount could push you into a higher tax bracket, she said.
This tax treatment aims to discourage individuals from accessing a savings withdrawal benefit when they have other income sources and don’t need to dip into their retirement fund savings.
For example, Leibowitz used a scenario where a 35-year-old full-time employee with a taxable income of R370,000 withdrew from her savings pot.
“Based on the 2023/2024 income tax table, their tax liability will amount to R59,997 (R42,678 + 26% of the amount above R237,100 – primary rebate of R17,235). If they decide to access a savings withdrawal benefit of R25 000, they would be pushed into a higher tax bracket and will be liable for a tax of R67,722 (R77 362 + 31% of the amount above R370,500 – primary rebate of R17,235),” she explained.
Leibowitz said that accessing a savings withdrawal benefit at any time before retirement may have a far more significant impact than you realise.
If you are young, you might assume you have a lot of time to replenish the amount you’ve withdrawn. However, she added that failing to preserve that investment will cost you more than you may realise because you will miss out on the power of compounding.
Compounding is often called the “eighth wonder of the world”. It means that you earn returns today on the returns you made yesterday, on top of the amounts of money you contribute. This can help you grow your savings faster and achieve your financial goals sooner.
“If, for example, you plan to retire at age 65 and decide to take a savings withdrawal benefit of R50,000 at the age of 35 to spend on a holiday or a few months of fun, you could lose out on up to R870,000 that would have been used to provide you with an income during retirement,” Leibowitz explained.
That’s a big difference, assuming total investment growth is 10% per year for 30 years – inflation at 6% plus 4% – and the investment is assumed to grow steadily; no volatility is considered.
“Wherever possible, retirement fund members should avoid accessing their savings withdrawal benefit. If you have another source of capital and income and do not have essential expenses that you would not otherwise be able to afford, always maintain your investment in your retirement fund,” she said.
Leibowitz added that staying the course will significantly impact the amount of money you will have to provide you with an income during your retirement.