How will the two-pot system be taxed in South Africa?
South African pension fund members who are considering accessing a portion of their retirement savings under the two-pot system must realize that it is a costly way of getting money.
Withdrawals from the savings pot will be taxed at the marginal rate, which is significantly higher than the existing tax rate applicable to early retirement fund withdrawals.
Example: Mr. X’s Withdrawal
Suppose Mr. B resigns and decides to withdraw his total retirement fund credit of R50,000. Under the current system, Mr. B would pay 18% tax, amounting to R4,050 (since the first R27,500 is tax-free, and the balance is taxed at 18%).
Under the new two-pot system, if Mr B, with an annual salary of R300,000, withdraws R50,000 from his savings pot, he will incur 26% tax – amounting to R13,000. This significant difference is because the R50,000 withdrawal gets added to his taxable salary, increasing his marginal tax rate to 26%.
What is the two-pot system?
Under this system, a retirement fund member’s contributions are divided into a savings component, which is accessible once per tax year, and a retirement component. Additionally, for existing retirement fund members, a third component known as the vested pot will include all contributions made up to 31 August 2024.
What is the maximum withdrawal from the two-pot retirement system?
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. If you retire with R1 million in savings, this means you can only take R40,000. This rule is a “safety rule” to ensure that you do not run out of savings during a 30-year retirement period.
What is the new law on pension withdrawal in South Africa?
From 1 September 2024, South African workers who contribute to a retirement fund will be able to withdraw a portion of their retirement savings. The two-pot system allows you to access a part of your retirement savings before you retire.
Here’s a simplified breakdown of the two-pot system:
- Vested Component: This includes all retirement savings accumulated up to 31 August 2024. Existing rules apply for accessing these funds, such as upon leaving your employer, emigrating, or in cases of disability or death. Upon retirement, these funds are available as a lump sum.
- Retirement Component: Two-thirds of contributions made from 1 September 2024 onwards will be allocated here. These funds are locked until retirement, at which point they must be used to purchase a retirement income product.
- Savings Component: One-third of contributions from 1 September 2024 will go into this component, initially funded by a once-off allocation from the vested component (up to 10% of its value at 31 August 2024, capped at R30,000). You can access these funds annually, subject to a minimum of R2,000. At retirement, this can be taken as a lump sum or used to purchase a retirement annuity income product.
Who is it for?
Any South African who has a pension fund, provident fund, retirement annuity, or preservation fund.
Conclusion
While the two-pot system offers flexibility, the substantial tax implications necessitate careful consideration. Fund members should utilize available resources, such as tax simulators, to make informed decisions about whether to withdraw from their savings pots. The potential financial impact, both immediate and long-term, underscores the importance of evaluating all factors before accessing retirement savings.
Navigating the complexities of the two-pot retirement system and its tax implications can be daunting. To ensure you make the best financial decisions for your future, take advantage of available resources like tax simulators and consult with financial advisors. Don’t let unexpected tax burdens catch you off guard. Plan ahead, stay informed, and make the most of your retirement savings.
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