Coronation retirement tax warning

Withdrawing funds from retirement savings before maturity will have significant tax implications, even under the new two-pot retirement system. 

The head of personal investments at Coronation, Pieter Koekemoer, issued this warning, saying South Africans should resist the urge to withdraw funds from their retirement savings. 

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. 

The most significant change under the new system is that you will be allowed one annual early withdrawal from your retirement lump sum pot. 

The value in your savings pot will initially be seeded by R30,000, or 10% of your fund value at implementation (whichever is the lowest), transferred from your vested pot.

From 1 September, one-third of your future contributions will be allocated to this savings pot.

Koekemoer urged South Africans to remember that withdrawing funds from the lump sum pot annually is not an obligation but merely an option to help them through tough financial times. 

Preferably, South Africans should not withdraw any amount from their retirement fund to prevent them from interrupting the compound process. 

Importantly, withdrawing from your retirement savings early will also have severe tax implications. 

“You will essentially lose the tax benefits you received from the government when you contributed towards your retirement annuity,” Koekemoer warned. 

If you wait until retirement before withdrawing your money, the preferential retirement lump sum tax tables will apply. 

However, if you withdraw early, the more punitive marginal tax rates will be deducted from your withdrawal. This can significantly impact your retirement.

Koekemoer gave an example of how this would look in practice.

Assuming your annual taxable income is R240,000. Whatever withdrawal you make from your savings pot will be taxed at a rate of at least 26% or more than a quarter of the money you access. 

If you withdraw at retirement age, the first R550,000 lump sum will be taxed zero. This principle also applies at the higher end of the income scale.

For a R10 million lump sum withdrawal at retirement, your effective tax rate will be 33% compared to the early withdrawal rate of 45%. This is assuming you earn more than R1.8 million in that tax year. This is a 12 percentage point difference in tax payable.