The two-pot retirement system is officially live in South Africa, but there are significant tax implications that South African fund members have to consider.
The new system will have two pots—a “savings” pot and a “retirement” pot.
The savings pot will be one-third of retirement savings from today, 1 September and be accessible before retirement.
The retirement pot will hold the remaining two-thirds of retirement savings and only be accessible upon retirement age.
A third “vested” pot holds the retirement savings up until 31 August, except for a maximum of R30,000 used as seed capital in the savings pot, and follows existing legislation.
The system is designed to ensure South Africans can access some of their savings in an emergency while maintaining the majority of their funds for retirement.
However, William Khwela, Senior Tax Specialist at Nedbank Private Wealth, said that accessing one’s retirement savings could impact one’s potential earnings.
South Africans will be able to access the seed capital in the savings pot from today, but wealth and tax implications should be considered.
If the R30,000 in the savings pot is allowed to grow at an average investment return of 7%, it will be worth R59,000 in 10 years’ time.
In 20 years, it will be worth R116,000, and in 30 years, it will be worth R228,000 — eight times the original vesting amount.
The South African Revenue Service (SARS) will also take its share for those who choose to withdraw the maximum of R30,000 from today onwards.
At a 20% marginal tax rate, R30,000 will turn into R24,000 for the withdrawer.
What to do instead
Those who need cash down the line and leave their savings pot invested until retirement should consider a well-managed savings strategy. This strategy helps weather financial storms without compromising long-term security.
There are a few simple ways that one can make to avoid dipping into their savings pot:
- Have an emergency fund – Members should start building a separate emergency fund to handle unexpected expenses.
- Explore alternative financing – If you urgently need funds, consider speaking to your bank about a personal loan at a competitive interest rate. You’ll have to pay the money back with interest, but the long-term value of leaving your retirement savings untouched should exceed these costs.
- Set clear financial goals – Clear goals can help one save for the things they need in the future without compromising on their retirement plans.
- Make extra contributions – Consider making additional contributions to your retirement savings as part of a recovery strategy. If your financial situation improves shortly after dipping into your savings pot for emergencies, use your additional voluntary contributions to replace funds in your retirement fund. This allows one to take advantage of a tax deduction at your marginal rate, capped at R350 000, with any remaining balance carried forward into future tax years.
“As the two-pot system comes into effect, you’ll have more flexibility in managing your retirement savings. However, with this flexibility comes responsibility,” said Khwela