Tax warning for anyone withdrawing from the two-pot system
From 1 September 2024, the two-pot system will come into effect, which will provide significant changes to the state of South Africa’s retirement savings landscape.
While the new system will allow people to access some money from their savings for financial relief due to emergencies or unplanned expenses, experts urge people to mindful of the tax consequences that are attached.
That is because when an amount withdrawn from the savings pot before retirement, the person’s marginal tax rate will apply to the amount withdrawn.
When the new system kicks in, any amount saved in a retirement fund will be split into a savings component and a retirement component. One-third (about 33% of retirements savings) automatically goes into the savings component.
The initial amount in the savings component will be 10% of the amount saved in the vested component, up to a maximum of R30,000, with the minimum withdrawal amount at R2,000.
Head of Best Practice at Alexforbes, Vickie Lange outlines the the tax implications of the two-pot system are twofold, being:
- Tax incentives to keep savings in the retirement fund until the date of retirement; and
- Tax disincentives for taking savings out of the retirement fund before retirement.
“The retirement system is complex and members will be able to make decisions confidently once they understand the consequences of their different options,” said Lange.
“If a member waits until retirement to withdraw from the savings pot, then the retirement tax table applies and the first R550,000 is taxed at 0% making it tax-free. This is subject to previous amounts withdrawn before September 2024 or from the vested pot,” she added.
Marginal tax rates for the tax year ending 28 February 2025:
| Tax rate | Taxable income |
| 18% | > R237,100 |
| 26% | < R237,100 |
| 31% | < R370,500 |
| 36% | < R512,800 |
| 39% | < R673,000 |
| 41% | < R857,900 |
| 45% | < R1,817,000 |
Alexforbes said that for most members, it is only worthwhile to withdraw from their savings pot in the event of an emergency and if they do not have access to savings elsewhere.
Lange used two illustrative examples to show the impact that tax will have on withdrawing from the savings pot.
Example scenario 1
Mpho earns a taxable income of R250,000 per year, meaning that his marginal tax rate is 26%. He has R5,000 in his savings pot on 2 September 2024 and decides to withdraw R4,000.
His administrator charges a processing fee of R210 and he has zero outstanding taxes owing to SARS.
| Description | Amount |
|---|---|
| Initial claim amount | R4,000 |
| Less processing fee | R210 |
| Amount after processing fee | R3,790 |
| Less tax [(R4 000 – R210) * 26%] | R985 |
| Amount after tax | R2,805 |
| Less outstanding tax owing to SARS | R0 |
| Amount Mpho will receive after deductions | R2,805 |
Example scenario 2
Thandi earns taxable income of R675,000 per year, with a marginal tax rate is 39%.
She has R20,000 in her savings pot on 2 September 2024 and decides to withdraw R16,000. Her administrator charges a processing fee of R380
She has R2,300 outstanding taxes owing to SARS.
| Description | Amount |
|---|---|
| Initial claim amount | R16,000 |
| Less processing fee | R380 |
| Amount after processing fee | R15,620 |
| Less tax [(R16,000 – R380) * 39%] | R6,092 |
| Amount after tax | R9,528 |
| Less outstanding tax owing to SARS | R2,300 |
| Amount Thandi will receive after deductions | R7,228 |
As seen from these scenarios, the tax payment can significantly erode the amount paid to the members.
“Had Mpho and Thandi kept their savings invested in their retirement funds and only withdrawn them at retirement, no tax would have been payable on the withdrawal amounts up to R550 000 – assuming they had not taken any lump sum withdrawals previously from their retirement funds before September 2024 or from the vested pot,” said Lange.
“It’s important to be aware of the tax that would be payable before withdrawing from your retirement fund and if you need help, speak to a financial advisor or tax consultant,” she added.
Other possible deductions
Fees related to the two-pot system, including savings pot withdrawals, may apply and will differ per administrator.
Lange explained that in certain circumstances, you might have restricted access to your savings pot in part or in full due to amounts owed by you to third parties which is secured or payable by the fund.
This includes housing loans, employer judgments or pending judgements, divorce and maintenance orders.
“Funds are obliged to restrict access to the savings pot if it could leave insufficient funds to pay these amounts owed to third parties,” said the Alexforbes Head of Best Practice,
“We suggest that members save for emergencies separately instead of relying on their savings pot, which should only be used as a last resort.”
“Members are likely to need cash lumpsums at retirement to meet their needs… so, it’s important not to deplete or use most of their savings pot before retirement,” and if confused, speak to a financial advisor, she added.
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