Retirement tax warning from Allan Gray

Allan Gray

Asset manager Allan Gray cautioned members about South Africa’s new two-pot system, as withdrawing from their savings pot could push them into a higher tax bracket.

This comes as South Africa’s retirement savings system is set to change. The implementation date of the new system is set for 1 September 2024.

Allan Gray’s retail legal team manager, Jaya Leibowitz, said all current and future retirement fund members will be impacted by the change.

The two-pot retirement savings system aims to promote the preservation of retirement fund investments until members retire while also allowing them access to a portion of their savings during their working years. 

“From the date of the implementation of this system, all contributions to provident, pension and retirement annuity funds will be split into two components,” she said. 

One-third of the contributions will be credited to a savings component, which members can access before retirement in the event of an emergency. 

The remaining two-thirds will be credited to a retirement component, which will be inaccessible before a member retires and must be used to purchase a pension-providing product at retirement. 

Source: Allan Gray

She said that having some access to a retirement investment without having to resign from employment may assist members in times of need.

“The two-pot system has the potential to create good outcomes for retirement fund members, helping those who desperately need some access while ensuring greater levels of preservation due to the inaccessibility of the retirement component,” she said.

“However, it is important to remember that the intended purpose of your retirement investment is to provide you with an income in retirement.”

“While the savings component allows you access, it is prudent to guard against thinking of it as a discretionary savings account.” 

Each time someone accesses a savings withdrawal benefit, the amount available to provide them with an income in retirement will be reduced. 

In addition, that savings withdrawal benefit will be taxed and has the potential to push someone into a higher tax bracket, depending on their income and the value of the withdrawal.

This is because any amount accessed in cash as a savings withdrawal benefit will be taxed at your marginal income tax rate, which will depend on your taxable income for the tax year, including the withdrawal amount. 

The retirement fund or its administrator will apply for a tax directive from the South African Revenue Service and deduct the tax before paying you your benefit.


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