SARS tax warning about new pension fund system

The South African Revenue Service (SARS) warned that people who want to withdraw from the savings pot of the two-pot retirement system must be registered for tax.

In March, Parliament passed the Pension Funds Amendment Bill, requiring funds to be divided into three components from 1 September 2024.

These three components, referred to as pots, will be split between savings, retirement, and vested portions.

• Two-thirds of your contribution will be allocated to a retirement component, which must be preserved until you retire.
• The remaining one-third will be allocated to a savings component, from which you can withdraw once per tax year before retirement.

The withdrawal amount will be limited to the savings component’s value at the withdrawal date.

Many asset managers, including Allan Gray, Sanlam, and Momentum, have warned that withdrawals will be taxed heavily.

The withdrawal transaction will be treated as additional annual income if a member decides to access their savings pot before retirement.

This means this pension fund savings component withdrawal will be taxed at the member’s marginal income tax rate.

All administration costs of the withdrawal transaction will also be deducted from the savings withdrawal benefit.

This will significantly impact the amount a member receives when withdrawing from their retirement fund early and the tax they pay.

For example, someone who withdraws R10,000 from their retirement fund under the new two-pot system.

It an individual earns between R370,000 and R512,000 a year and is taxed at a marginal rate of 31%, they will lose nearly half of the withdrawal amount to tax and transaction fees.

This member will receive only R6,762 of the R10,000 withdrawal. R200 will go to the transaction fee, and the rest will be lost to tax.

SARS tax warning

The South African Revenue Service (SARS) warned that people who want to withdraw from the savings pot from 1 September 2024 must be registered for tax.

Those who are not registered must register before they apply to their relevant fund. If a person is not registered for tax, the request for a tax directive sent from the fund to SARS will be rejected.

Contributions to retirement funds are not taxed. Therefore, the tax will be deducted from any amount withdrawn. Tax will be calculated at the tax rate applicable to the individual.

Taxpayers must also ensure they have no outstanding returns and do not owe SARS. Debt owed to SARS will be deducted from the withdrawal amount.

Taxpayers are not required to go to a SARS office, as most applications are available on one of SARS’s digital or mobile channels.

“Pension fund members can register for tax using the eFiling channel or the SARS MobiApp,” SARS said.

“They can also use the SARS Online Query System (SOQS) on the SARS website to register for personal income tax.”

If they are already registered, they can use the SOQS to check their tax reference number.

“A fund administrator can only apply for a tax directive once a member has made a final decision to withdraw,” SARS said.

After a registered taxpayer has applied, the pension fund will apply to SARS for a tax directive. The successful directive informs the fund how much tax to deduct from a withdrawal.

If a taxpayer is fully compliant, SARS will take up to 48 hours to issue the tax directive to the pension fund.

This tax directive will contain information about the pension fund member’s tax liability—hence, how much tax should be deducted from the withdrawal.

Before a final amount is paid to the applicant, the pension fund will also be informed to deduct any outstanding debt on behalf of SARS before any payout is made to the member.

“The withdrawal will not be affected if a person has a debt arrangement with SARS. If a debt is owed to SARS, it will be deducted according to the arrangement,” SARS said.