SARS gets R12.9 billion in extra tax revenue from two-pot retirement system

SARS has collected an additional R12.9 billion in tax revenue in just six months, thanks to the implementation of South Africa’s new two-pot retirement system. 

This significantly improved the government’s financial position at the end of its last fiscal year and is expected to boost economic growth through increased consumer spending in the short term. 

However, it has also raised concerns about the long-term impact of allowing South Africans to access their retirement savings for immediate needs. 

In its latest Quarterly Bulletin, the Reserve Bank analysed the impact of the two-pot retirement system on the South African financial system during the first six months of its implementation. 

The two-pot retirement system came into effect on 1 September 2024 and aims to give retirement fund members short-term access to their savings while also ensuring long-term retirement security. 

This reform grants retirement fund members partial access to their retirement funds, with one-third of the contributions allocated monthly to the savings pot to allow for emergency withdrawals. 

The remaining two-thirds is allocated to the long-term retirement component, which must be preserved until retirement.

Previously, members could only get access to their retirement funds upon exiting the fund.

The Reserve Bank said that following the implementation of the new system, withdrawals from both private and official retirement funds increased sharply. 

Total withdrawals increased by 19.4% from the second quarter of 2024 to the third quarter, when the legislation was introduced and by a further 12% in the final quarter of the year. 

This has raised administrative costs for asset managers, with many choosing to impose a fee on withdrawals to cover these costs. 

This has adversely affected the net income of retirement funds, which declined from R31.8 billion in the second quarter to R16 billion in the third quarter, and even lower to only R9 billion in the fourth quarter. 

Ongoing high pension withdrawal claims and administration costs, related to managing two separate retirement pots and ensuring regulatory compliance, could continue to impact the net income of retirement funds in the near term.

The increase in withdrawals following the implementation of the two-post system can be seen in the graph below. 

SARS wins big

Members who withdraw from the two-pot system are subject to significant tax obligations, as the money taken out is taxed at the individual’s marginal income tax rate. 

This means that the money withdrawn from the retirement fund will be added to the individual’s other income for the year and then taxed according to the normal income tax brackets. 

Thus, withdrawing from your retirement fund may bump you up a tax bracket and significantly increase your tax burden. 

SARS initially projected that it would collect R5 billion in additional tax revenue from two-pot withdrawals during the 2024/25 financial year. 

However, collections quickly exceeded these expectations as millions of South Africans accessed their retirement savings. 

By the end of the financial year at the end of February 2025, SARS had collected an additional R12.9 billion in income tax from two-pot withdrawals. 

The Reserve Bank said introducing the new retirement system was expected to have significant fiscal and macroeconomic implications. 

By the end of October 2024, tax revenue of R7.6 billion had already been collected from retirement fund withdrawals associated with the two-pot retirement system. 

The strong uptake continued in the subsequent months, with the cumulative tax revenue from retirement fund withdrawals reaching R11.3 billion by the end of January 2025 and then surging to R12.9 billion in March. 

The additional R12.9 billion tax revenue raised through the introduction of the two-pot retirement system in fiscal 2024/25 boosted personal income tax (PIT) collections from R720 billion to R733 billion. 

This resulted in year-on-year growth in PIT of 12.6% in fiscal 2024/25 compared with 10.6% when excluding tax revenue from two-pot related withdrawals.

Although the year-on-year rates of change in the monthly PIT collections are usually quite volatile, notably higher growth rates were observed during some months in fiscal 2024/25. 

The highest year-on-year increases occurred in October 2024 (20.1%) and November 2024 (16.9%), reflecting increased collections related to the sizeable withdrawals under the two-pot retirement system

This can be seen in the graphs below.