Allan Gray retirement fund warning

Allan Gray’s head of tax, Carla Rossouw, has warned that withdrawing money from your two-pot retirement fund should be a last resort.

This is because withdrawals are not only taxed at your marginal rate, with the potential to bump you into a higher tax bracket, but they could also reduce your income during retirement if not replaced.

South Africa’s two-pot retirement system was introduced on 1 September this year. It divides all future contributions from retirement fund members into two components: a savings component and a retirement component.

“The new system aims to preserve your retirement investment for its intended purpose while offering you access to your savings component once per tax year in case of emergency,” Rossouw explained. 

When the system was implemented in September, millions of South Africans rushed to withdraw.

According to Momentum’s latest annual results, the insurer has handled over 150,000 withdrawal claims with a value of R2.5 billion.

Old Mutual CEO Iain Williamson said the company received 125,000 withdrawal requests, totalling R1.7 billion, in the first ten days the system was open.

Alexforbes said it also experienced more than R1.5 billion in withdrawals within the first two weeks of the new system’s implementation. 

South Africans largely use their withdrawals from the new two-pot retirement system to settle short-term debt and cover expenses related to their homes or cars. 

Guy Chennells, chief commercial officer at Discovery Corporate and Employee Benefits, outlined the results of a survey of individuals who submitted withdrawal requests. 

There has been much speculation about what South Africans would do if they had the opportunity to withdraw a portion of their retirement savings prematurely. 

Many thought it would be used to fund ‘revenge spending’, where consumers who have cut back on buying clothes, furniture and other discretionary items would splash their cash at retailers. 

Others thought it would be used to pay back debt or fund a once-off large expense, such as a downpayment on a house. 

Regardless of what South Africans want to spend their withdrawals on, Rossouw encouraged investors to understand the implications that come with withdrawing.

SARS registration

“To withdraw from your savings component, you must be registered with SARS,” Rossouw said. 

To check whether you are registered, you can visit the SARS Online Query System, SARS MobiApp and SARS eFiling.

Annual withdrawals

Rossouw explained that the minimum withdrawal amount is R2,000, and you may withdraw up to the full value of your savings component if necessary, as withdrawals are not capped at R30,000. 

“This was simply the maximum amount used to ‘seed’ your savings component in the beginning so that you had an opening balance,” she explained.

However, you are subject to one withdrawal per tax year for each of your retirement fund accounts.

Tax implications

Withdrawals are taxed at your marginal tax rate, meaning higher-income earners face higher deductions. 

“The higher your income, the higher your marginal tax rate, which means that the value of your withdrawal could push you into a higher marginal tax bracket, resulting in a higher tax bill in that tax year,” Rossouw explained.

She also emphasised that tax directives issued by SARS are final and can’t be reversed, so thorough planning is needed. 

“Using the SARS Two-Pot Retirement System Calculator will provide you with an estimate of the tax that will be deducted from your withdrawal,” she said.

Marginal tax rate

Rossouw explained that if a retirement fund member withdraws from their savings component before retirement, they are reducing their provision for retirement and, in principle, should not benefit from it.

She said savings component withdrawals are taxed at your marginal tax rate so that “if you contribute to and withdraw from your retirement fund in the same tax year, you will be in a tax-neutral position”.

Lump-sum retirement withdrawal

“Savings-component withdrawals aren’t classified as retirement fund lump-sum withdrawals for tax purposes,” Rossouw said. 

“This means that it won’t reduce the R550,000 tax-free withdrawal amount available at retirement.”

Tax implications at retirement

According to Rossouw, if you don’t withdraw before retirement, the balance in the savings component can be withdrawn as cash at retirement or used to purchase a retirement-income product. 

“Any cash withdrawn at retirement will be taxed as a lump-sum benefit. These tax rates are generally lower than the marginal tax rates applied to withdrawals before retirement,” she said.

Think before withdrawing

“Although it’s tempting to dip into the cookie jar, you should only make use of this facility if you have no other option,” she said. 

“Remember that any assets withdrawn and not replaced will reduce your income during retirement.”

 Given the immediate and long-term tax implications of early withdrawals, Rossouw suggested consulting an independent financial adviser before submitting your withdrawal instructions.