Retirement fund warning from Allan Gray

Allan Gray has warned South Africans against withdrawing funds from their retirement savings once the two-pot retirement system is implemented by the National Treasury on 1 September. 

Senior legal advisor at Allan Gray, Jaya Leibowitz, outlined why it is a bad idea for South Africans to unnecessarily withdraw funds from their retirement savings and break the compounding process. 

Commonly referred to as the ‘two-pot system’, the new rules applicable to retirement funds are proposed to launch on 1 September 2024. 

This will require all future contributions made to retirement funds to be split into two 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 your retirement. 

The withdrawal amount will be limited to the value in the savings component at the date of withdrawal. 

This new system aims to promote the preservation of savings until retirement while also providing retirement fund members with some access to their savings in times of need.

Leibowitz said that while this may come as a relief to South Africans who need it, they should rather avoid taking money out of their retirement savings to preserve it for its intended purpose – to provide them with an income when retired. 

Aside from breaking the compounding process and reducing the amount of money they will have to live off in retirement, withdrawing funds also has tax implications. 

A withdrawal will be included in the individual’s gross income for the tax year, explained Leibowitz. This means the amount withdrawn will be taxed at their personal income tax rate. 

“It is important to understand that because it is included in gross income, the withdrawal amount could push you into a higher tax bracket,” she warned. 

This aims to discourage individuals from accessing a savings withdrawal benefit when they have other sources of income and don’t really need to dip into their retirement fund savings.

“Wherever possible, retirement fund members should avoid accessing their savings withdrawal benefit,” Leibowitz said.

Staying invested for the longest time possible will significantly impact the amount of money you will have to provide you with an income during your retirement.