Allan Gray pension fund tax warning in South Africa

Allan Gray and Coronation have warned South Africans to carefully consider the impact of withdrawing from their savings under the new two-pot system.

The two-pot retirement system is a reform that will allow retirement fund members to make partial withdrawals from their retirement funds before retirement.

This reform, which will come into effect on 1 September 2024, will split retirement savings into a one-third savings component and a two-thirds retirement component.

South African retirement fund holders will have access to a cash portion – the savings component – while preserving the rest for retirement.

The new two-pot system aims to help South Africans in financial distress access cash without resorting to extreme measures, like resigning to access their retirement funds.

Getting immediate access to a lot of money when the two-pot system kicks in on 1 September 2024 can cause reckless financial behaviour among some people.

Many asset managers, including Allan Gray and Coronation, have warned South Africans that it is detrimental for them to withdraw retirement funds unless necessary.

Allan Gray cautioned its members that withdrawing from their savings pot could push them into a higher tax bracket.

Allan Gray’s retail legal team manager, Jaya Leibowitz, said while the savings component allows people access to cash, it should not be viewed as a discretionary savings account.

When people withdraw money from their retirement savings, it reduces the amount of money for retirement.

Another consequence of withdrawing money is that it will be taxed and can potentially push someone into a higher tax bracket.

Any amount accessed in cash as a savings withdrawal benefit will be taxed at the person’s marginal income tax rate.

The marginal income tax rate will depend on your taxable income for the tax year, including the withdrawal amount.

The retirement fund or its administrator will apply for a tax directive from the South African Revenue Service and deduct the tax before paying you your benefit.

Coronation’s head of personal investments, Pieter Koekemoer, echoed Leibowitz’s concerns about tax and reduced retirement money.

Koekemoer said withdrawing funds from retirement savings before maturity has significant tax implications, even under the new two-pot retirement system.

He urged South Africans to remember that withdrawing funds is not an obligation but merely an option to help them through tough financial times.

He added that South Africans should resist the urge to withdraw funds from their retirement savings.

“Preferably, South Africans should not withdraw any amount from their retirement fund to prevent them from interrupting the compound process,” he said.

By withdrawing funds early, people will lose the tax benefits they received from the government when they contributed towards their retirement annuity.

“If you wait until retirement before withdrawing your money, the preferential retirement lump sum tax tables will apply,” he said.

“However, if you withdraw early, the more punitive marginal tax rates will be deducted from your withdrawal. This can significantly impact your retirement.

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