Retirement fund tax warning from Sanlam

Withdrawals from your retirement fund will be taxed heavily and significantly impact your outcomes following your work career, even under the new two-pot system. 

This is feedback from Sanlam’s consulting actuary, Ryan Campbell-Harris, who explained how early withdrawals will result in hefty tax obligations in the company’s Benchmark Survey for 2024. 

The new two-pot retirement system aims to promote the preservation of retirement savings until maturity while limiting access to a portion of those savings in an emergency. 

This is the most significant change to the retirement system, with members being allowed one annual withdrawal from their savings pot. 

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 retirement. 

There will be a third pot for individuals with an existing retirement fund that retains the value of all their contributions before the implementation of the new system on 1 September. 

Even though the savings pot is intended to be available as a lump sum at retirement, members can access up to 100% of their savings pot once per year before retirement. The minimum withdrawal amount is currently R2,000. 

Members will be forced to preserve their retirement pot until retirement. It will then need to be used to purchase a pension either from an insurer or from the fund to which they belong.

Should a member decide to access their savings pot before retirement, the withdrawal transaction will be treated as additional annual income and 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.

Campbell-Harris said this will significantly impact the amount a member receives when withdrawing from their retirement fund early and the amount of tax they pay.

He gave an example of someone who withdraws R10,000 from their retirement fund under the new two-pot system. 

Assuming this 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. 

Coronation’s head of personal investments, Pieter Koekemoer, said the impact on individuals who withdraw from their retirement funds early may be even greater. 

“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. 

The first R550,000 lump sum will be taxed zero if you withdraw at retirement age. 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.

This is shown in the table below.