As a result of the implementation of the two-pot retirement system on 1 September 2024, retirement fund members are now allowed one withdrawal of at least R2 000 from their savings component
One-third of contributions from 1 September 2024.
per tax year. Members are now granted controlled access to a portion of their retirement savings, which can be used to assist in times of financial hardship while preserving the majority of their future savings in the retirement component Two-thirds of contributions from 1 September 2024. Two months post implementation of the two-pot retirement system, SARS reported that they had received 1.6 million SWB tax directive applications amounting to a total gross lump sum payout of R29 billion.
Debt may reduce the withdrawal amount
Fund administrators have indicated that a significant number of the members who applied for a SWB ended up with small withdrawal amounts because of outstanding debt. The South African Revenue Services confirmed that of the R7.2 billion withheld in taxes, R750 million was offset as debt owing to them.
Each of these SWB applications approved by SARS to date, would likely have been for R30 000 or less as that was that was maximum gross value “seeded” at the beginning of September 2024. Going forward, however, as members continue to make contributions to their retirement funds, the value of their savings component
One-third of contributions from 1 September 2024. s will grow even more. As the size of the savings component One-third of contributions from 1 September 2024. increases, more members might become tempted to take advantage of the access that is granted to their retirement savings.
Why members should think twice before making a withdrawal
Members who consider withdrawing from their retirement fund might initially only focus on the immediate costs of taking a SWB such as tax and administration charges. There are, however, important long-term financial implications that members need to take note of and understand. These long-term implications will likely have a bigger impact on their retirement savings and will make it difficult or even impossible to recover the loss.
The money contributed to a retirement fund is money that members put aside for their future self in their retirement years. When a member withdraws from their savings component
One-third of contributions from 1 September 2024.
before retirement, they take money from their future self. It results in a decrease of the capital they will be able to access as a cash lump sum when they reach retirement and/or use to provide an income during retirement.
Along with the loss in capital, taking money from the savings component
One-third of contributions from 1 September 2024.
before retirement results in the loss of:
- tax-free investment income (interest and dividends),
- protection from creditors,
- exclusion from estate duty, and
- compound growth.
The power of compounding
As the famous Albert Einstein quotes goes, “compound interestCompound interest is the interest that you earn on interest. It’s basic math, really: if you have R100 and it earns 5% interest each year, you’ll have R105 at the end of the first year. At the end of the second year, you’ll have R110.25. Not only did you earn R5 interest on the initial R100 capital, you also earned R0.25 in interest on the R5 interest. Compound interest is the interest that you earn on interest. It’s basic math, really: if you have R100 and it earns 5% interest each year, you’ll have R105 at the end of the first year. At the end of the second year, you’ll have R110.25. Not only did you earn R5 interest on the initial R100 capital, you also earned R0.25 in interest on the R5 interest. is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it,”
The example below illustrates the power of compounding and the impact a savings withdrawal benefit will have on a member’s future retirement savings. In the example, we have used the projections from the Glacier EstiMate which is a tool that is designed to provide intermediaries with an illustration of the impact of withdrawing from the savings component One-third of contributions from 1 September 2024.
before retirement. The tool aims to assist intermediaries in guiding their clients in making an informed and responsible decision. Read more about the Glacier EstiMate here.
Example: Hannah and Marissa are 35 and are both members of a retirement annuity fund. They both have retirement savings of R 3 000 000 and make a monthly contribution of R5 000 to the fund.
Hannah decides to take a once-off withdrawal of R200 000 from her savings component
One-third of contributions from 1 September 2024.
. Marissa does not withdraw from her retirement savings. The table below summarizes Hannah and Marissa’s projected retirement savings at 65:
This example assumes an annual growth rate of 8% for the funds invested across the three components for 30 years and 0% annual increase in contributions.
Due to her decision to take a SWB when she is 35, when they retire at 65, Hannah will have R2 012 531.38 less in her retirement annuity fund than Marissa. This amount could have been added to the amount available to take as a cash lump at retirement or it could have been added to the amount that will be used to purchase an annuity.
Furthermore, if Hannah wanted to make up for the withdrawal over the 30 years, she would need to contribute an additional amount R1 428.80 per month to the fund (R17 145.60 per year).
Harnessing the expertise of a financial planner is wise
Members are encouraged to carefully consider their options and consult their financial intermediary or tax practitioner before making a withdrawal from their savings component
One-third of contributions from 1 September 2024. There are alternative investment solutions that can be used for emergency savings to avoid dipping into the savings component One-third of contributions from 1 September 2024. before retirement and losing out on compound growth and other benefits.