During and after the Covid-19 pandemic, the media reported that many retirement fund members who found themselves in financial stress had solved their problems by resigning and withdrawing their entire retirement funds. These reports highlighted a practice that was not new.
In a document titled “Encouraging South African households to save more for retirement” in December 2021, the National Treasury reported that, according to South African Revenue Service (Sars) data for each of 2016, 2017 and 2018, more than 700,000 people cashed in their retirement funds.
These withdrawal figures have to be understood against the number of retirement fund members at the time which, according to a Treasury document, amounted to 6,751,578 in 2018. Interestingly, the Registrar of Pension Funds 2017 annual report indicates fund members of 16,945,651; but the report cautions that there is an element of double counting due to individuals who are members of more than one fund. Thus a number of fund members clearly have more than one fund to draw from.
According to a “Special Occasional Bulletin of Economic Notes” issued this month by the South African Reserve Bank (SARB), the amount of withdrawals during the 2016 to 2018 period averaged around R78bn per annum, compared to a R246bn annual pension contribution.
When these statistics were considered against another statistic from the SARB report which indicates that, according to the Association for Savings and Investment South Africa (Asisa) Foundation, only 6% of South Africans who are economically active can retire comfortably, alarm bells rang.
The result has been the two-pot retirement system, which comes to life on Sunday, September 1. This system is designed to make funds available to members of retirement funds, should they choose to access them, without depleting their entire retirement fund savings. This is important when one considers the profile of retirement fund members.
The Davis Tax Committee’s (DTC) “Wealth Tax Report”, issued in 2018, advised that, according to information furnished to the DTC by Asisa, “there are currently 6.79-million South Africans with some form of retirement savings. Of this population, approximately 5-million are below the UIF ceiling of R178,000 per annum, of whom approximately 3-million are even below the current income tax threshold of R75,000 per annum.” Thus the majority of people that the two-pot retirement system is likely to help are retirement fund members who don’t have high incomes.
However, as is constantly reiterated by the retirement fund industry, retirement fund members should exercise caution when making a decision to access their funds via this or any other mechanism. They should strive to maintain and grow their retirement funds until they retire in order to have enough to retire reasonably comfortably at that point.
Nevertheless, current circumstances don’t always allow for that, so the two-pot retirement system operates to allow for one withdrawal from the retirement fund member’s “savings pot” (minimum R2,000 withdrawal) each tax year. The individual can withdraw everything in the savings pot but needs to be aware that if they owe anything to Sars before the withdrawal, some or all of the after-tax amount of the withdrawal might be channelled to Sars first.
Though the two-pot retirement system allows withdrawals without decimating the individual’s retirement fund, it also acts as a deterrent to withdrawal unless the individual is in dire straits
Because the system comes into operation on September 1 and, at that point, no amount of funds will have been contributed to the withdrawal (or, more officially named, “savings”) pot at that point, the system caters for 10% of the individual’s existing savings, up to a maximum of R30,000, to be transferred to that pot immediately. Thus, members will be able to claim a withdrawal immediately on September 1. It should be noted that the retirement funds of members who were aged 55 and over on March 1 2021 do not automatically fall into the two-pot retirement system and, unless they elect to be part of it, their retirement funds remain under the pre-existing system.
For those in the two-pot regime, all existing savings, up to August 31 2024, will otherwise remain in “the vested pot”, essentially a third “pot”, until retirement or resignation on the same basis as currently.
Thereafter, one-third of all contributions will be allocated to the savings pot and the other two-thirds will be allocated to the “retirement pot”, which has to be preserved until retirement and used to purchase an annuity. Thus, in most cases, even if they have withdrawn some of their retirement funds beforehand, members of retirement funds should have some savings left on retirement.
This all sounds ideal, but what has to be remembered is that any withdrawals from the savings pot will be added to the member’s other taxable income and taxed in full. This is designed to act as a deterrent to withdrawing but is not as penal as it sounds when one considers that contributions to the fund will have been treated as tax-deductible.
By way of example, a slide deck that accompanied a webcast by Sars that was aired on August 22 last year, provides a couple of examples of the cash result of a withdrawal: assume a person earns R380,000 in the tax year, they have no other taxable income and the 2024/2024 tax tables apply. They withdraw R25,000 from their savings pot. They will actually receive R16,750 after having paid tax (31% of the withdrawal) and an (estimated) admin fee to the fund of R500. If the person had earned R360,000, only part of their R25,000 would fall into the 31% tax bracket, so they would receive R17,275.
Ironically, in terms of the current tax table for withdrawals, a taxpayer who withdraws R25,000 will pay no tax. Anyone withdrawing more than R27,500 will pay tax at 18% on the amount up to R726,000, and above that 27% tax will be paid. Any withdrawal above R1,089,000 will currently attract a tax of 36%. It is thus clear that the two-pot retirement system will be more penal than the current system for those who withdraw and have other taxable income during the year. Importantly then, though the two-pot retirement system allows withdrawals without decimating the individual’s retirement fund, it also acts as a deterrent to withdrawal unless the individual is in dire straits.
Before the introduction of the two-pot retirement system, the SARB report advises us, that taxation on early withdrawals averages over R12bn each year. The report estimates, however, that Sars will collect R41bn more in personal income taxes for the tax year ended February 2025 and R32.4bn the following tax year. This is due not only to inflationary increases in salaries and wages but also because the retirement fund withdrawals will lead to higher expected employment. The Reserve Bank believes that consumption expenditure will increase in direct proportion to the additional disposable income from the retirement fund withdrawals “leading to higher GDP, with second-round effects leading to increased employment and therefore more taxable income”. For the same reasons, it sees corporate income taxes growing (by R2bn in the 2025 tax year and by R5.3bn in the 2026 tax year).
Thus, not only does the two-pot retirement system ensure people will have some money available when they retire while giving them some access during their working lives, but it also appears to provide a new “pot” of funds for the government and the economy too.
• Tickle is an adjunct associate professor in tax at the University of Cape Town
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.