Cape Town – With South Africa’s new two-pot retirement system set to begin on 1 September, individuals should be aware of potential costs and tax implications when withdrawing from their savings pot.
Tax rates on early withdrawals can be steep compared to withdrawals made at retirement, which benefit from a tax-free threshold.
Fees and possible restrictions on access due to outstanding debts could further reduce the amount received.
According to The Citizen, experts suggest maintaining a separate emergency fund to avoid depleting retirement savings prematurely.
“Members are likely to need cash lump sums at retirement to meet their needs, such as moving to a new house, paying off debt or putting money aside for medical costs during retirement. Therefore, it is important not to deplete or use most of your savings pot before retirement,” the report quoted Vickie Lange, head of best practice at Alexforbes as saying.
The two-pot retirement system comes into effect on 1 September 2024 and our Advisory Partner, Ilsevan Biljon joined @RadioLaeveld to unpack what it entails and what its implications are.
Listen to the interview below.#CitadelSA #BeyondRemarkable #TwoPotRetirementSystem pic.twitter.com/VH0azhuwvQ
— Citadel Investment Services (@CitadelSA) August 20, 2024
She added: “You should seek financial advice from an authorised adviser to make sure that your decisions suit your needs. The retirement system is complex and members will be able to make decisions confidently once they understand the consequences of their different options. This ultimately leads to better financial outcomes.”
In this, Lange concurred with an opinion piece published in The Conversation which urged members to “keep withdrawals to an absolute minimum. Only extract whatever is essential. You are robbing your future self by making an early withdrawal”.
It also said: “… be aware that you will be taxed on withdrawals from the accessible pot at your marginal tax rate. And, depending on what you earn and how much you intend to withdraw, you could nudge yourself into a higher tax bracket. In essence, the South African Revenue Service will treat your withdrawals as a boost to your income, and so these withdrawals will be subject to income tax.
President Cyril Ramaphosa has approved the Pension Funds Amendment Bill in July, enabling a new two-pot retirement system to boost retirement savings.
The Act amends several pension-related laws, introducing a savings withdrawal benefit and new account structures for pension funds.
President @CyrilRamaphosa has assented to the Pension Funds Amendment Bill which amends pension-related legislation to enable the implementation of the recently legislated two-pot retirement system, geared towards bolstering retirement savings. https://t.co/NOU7n7xPAt
— The Presidency 🇿🇦 (@PresidencyZA) July 21, 2024
From September 1, 2024, pension funds must adjust their rules and systems to allow members access to a portion of their savings.
“What is in the savings component will be available for withdrawal at any time before retirement. The ability to unconditionally access amounts from the savings component will be provided without the member having to cease employment or having to resign.
“A member will be allowed to make a single withdrawal within a year of assessment and the minimum withdrawal amount is R2 000. The ability to withdraw from the savings component will be applicable on a per fund or per contract basis,” the Presidency said.
Under the new system, one-third of contributions will go into a savings component, accessible at any time before retirement, and two-thirds into a retirement component, preserved until retirement.
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Compiled by Betha Madhomu
