Warning for South Africans who withdrew from their two-pot savings

People who withdrew from the savings component of their retirement funds under the new two-pot system must consider replenishing this amount before the end of February to restore their financial position.

Allan Gray’s head of tax, Carla Rossouw, said there can be tax benefits if people choose to do so.

She said that just because the two-pot system allows people to withdraw from their retirement savings once a year does not mean that they should.

In short, the system allowed South Africans to withdraw a portion of their retirement savings every year before retirement while another portion was kept in a vested “pot”.

Therefore, under this new system, retirement contributions are split into two “pots” – a savings component and a retirement component.

Rossouw explained that people can get tax benefits from retirement savings, especially with products such as retirement annuities (RAs) and tax-free investments (TFIs).

“Every year, you can claim a tax deduction for all contributions to your retirement investments of up to 27.5% of your taxable income, capped at R350,000 per tax year,” she said.

Both retirement funds and TFIs offer tax benefits, such as no tax on interest, dividends or capital gains, but they each have restrictions.

With retirement annuities, people set aside a set amount, and the additional amount they decide to invest is tax deductible.

Other benefits of RAs include the fact that they will be left untouched if someone goes into debt or goes bankrupt.

Additionally, people can take a lump sum of a third of the money when they retire, and the amount someone saves is taxed only upon withdrawal.

However, a retirement annuity’s money can only be accessed after age 55.

TFIs, on the other hand, do not allow individuals to make unlimited contributions to the investment and do not offer tax deductions.

These investments are capped at R36,000 annually and R500,000 over a person’s lifetime.

Furthermore, there can be penalties if SARS finds that people contribute more to these investments than the limits allow.

“You can incur a tax penalty of 40% on any amount over the contribution limits,” Rossouw warned.

However, these investments are available at any point in time.

She upholds this as the reason why tax-free investments can help people save for a specific goal or supplement their retirement investments.

She used the example of someone who contributes 15% of their salary towards retirement throughout their 30-year working life.

By the time they reach their retirement age, they will have saved R15.5 million. If they saved an additional R10,000 each year, they would have saved an additional 20%.

This additional money could have been saved through additional contributions to their RA or investing in TFIs.

So, Rossouw said that people can benefit significantly from topping up their investment before the end of the year.

“It’s always a good idea to maximise the tax benefits on offer, but even more so in a two-pot world if you have withdrawn from your retirement fund recently and want to restore your position.”

This is particularly important because people are taxed at a marginal rate when they tap into their RA’s savings component through the two-pot system before retirement.

She added that this marginal tax rate can be as high as 45%.

Besides having less cash available for retirement, if people withdraw from their retirement fund early, even if they replenish the amount of money, they will lose out on investment growth that could have happened in the meantime.

She pointed out how to take advantage of tax benefits before the end of the financial year.

“You can make an additional contribution, either in the form of a lump sum to your RA or, if you’re invested in your employer’s retirement fund, an additional voluntary contribution.”

“You can also start an RA in your own name or create a TFI to save for a specific goal or to supplement your retirement investment.”