By: Morné Janse van Rensburg
South Africa's Two-Pot Retirement System, introduced on September 1, fundamentally changes how retirement savings can be accessed and taxed. This system divides retirement contributions into two pots: a "Retirement Pot" (two-thirds) for long-term savings and a "Savings Pot" (one-third) for more flexible access.
The Two-Pot Retirement System, introduced by Sars, is a significant step towards addressing the dual needs of long-term retirement savings and short-term financial flexibility. This system ensures that a portion of retirement contributions remains preserved for retirement while allowing limited access to funds before retirement. It is a balanced approach that encourages sufficient savings for retirement and provides individuals with access to funds during financial emergencies, reducing the likelihood of eroding long-term savings through early withdrawals.
Although the Two-Pot Retirement System is mandatory for all new retirement contributions made after September 1, as, existing savings in retirement funds remain in the original system and are not subject to the new rules unless a member elects to transfer some of their savings to the new system. The mandatory nature of the new system means that for all future contributions, the split between the Retirement Pot and the Savings Pot will automatically apply.
It is important to consider the tax implications of the new system and its withdrawal allowances.
One of the most attractive aspects of any RA is the tax deductions they bring during the tax year. Contributions to a retirement annuity or other qualifying retirement products are tax-deductible up to 27.5% of the greater of your taxable income or remuneration, capped at R350 000 per annum. This allows individuals to reduce their taxable income significantly, encouraging retirement savings.
However, when you withdraw funds from your Savings Pot, the amount is added to your taxable income for the year and taxed according to your marginal tax rate which is significantly higher than the previous tax rate applicable to early retirement fund withdrawals. The withdrawal could also push you into a higher tax bracket, affecting your overall tax liability for the year.
You can withdraw funds from the Savings Pot before retirement, but withdrawals from the Retirement Pot are only allowed from age 55 unless you retire early due to ill health. The Retirement Pot is designed to provide an income during retirement and is subject to more stringent access rules to protect long-term savings.
Retirement fund payouts are typically calculated based on the accumulated value of the retirement savings at the time of retirement, considering factors like the total contributions, investment returns, and the annuity type chosen. Upon retirement, the Retirement Pot is used to purchase an annuity, which provides regular income over a set period or for life. The payout amount depends on the annuity type, chosen payment period, and interest rates and is subject to income tax.
Withdrawals from the Savings Pot before retirement are subject to ordinary income tax. In contrast, withdrawals from the Retirement Pot after retirement are subject to retirement fund lump sum tax rates, which are generally lower.
It is crucial to carefully consider the tax implications before making withdrawals and to work with your financial advisor to ensure all aspects are clearly understood and planned for.
Your financial advisor and/or tax planner should be able to plan and present examples of the various tax scenarios regarding the potential tax obligations in accordance with your larger tax plan.
* Janse van Rensburg is the managing director at Hobbs Sinclair Advisory.
PERSONAL FINANCE