Old Mutual retirement fund warning

With retirement withdrawals now open under the new two-pot system, many people are rushing to withdraw their savings, only to find that they do not qualify or face big tax deductions and lost investments. 

This is according to Old Mutual retirement reform executive Michelle Acton, who spoke to Newsroom Afrika. 

South Africa’s new two-pot retirement system allows individuals to withdraw a portion of their retirement savings once every tax year, with a minimum withdrawal of R2,000. 

Acton explained that since Old Mutual opened its application process, just over 135,000 claims, valued at about R1.7 billion, have been processed through the system. 

This number is fairly conservative, given that Old Mutual’s system does not allow people who do not qualify for withdrawals to apply. 

She explained that there are a number of reasons why people may not qualify for withdrawals. “The first is you don’t have a retirement product,” Acton said.

The second is that members may have less than the R2,000 minimum saved in their retirement fund.

“That’s quite a large chunk of membership. We have about 30% of our members who have less than R2,000 in their savings pot, so they’ll have to wait until their contributions enable that savings pot to get up to the R2,000.” 

Members who are part of an old “Legacy” retirement product exempt from the two-pot system will also not qualify for withdrawals. 

Acton explained that members in a Provident fund who were over 55 as of March 1st may not qualify either, since they are required to opt into the new system first.

Even where members do qualify for deductions, that does not necessarily mean they will get any money after submitting their claim.

This is because of the possible tax implications that could follow from the claim being processed by SARS. 

SARS may make a standard tax deduction, Acton explained. In this case, SARS will calculate the tax you owe based on your marginal tax rate, deduct the required tax, and pay the remaining balance out to the claimant.

SARS will decline the process if a member’s tax affairs are not in order, and your claim will be rejected.

She added that where members owe SARS any outstanding taxes, penalties, or unpaid amounts from previous years, they can deduct this debt from their payout. This is known as the IT88.

“Essentially, what will happen is SARS can then deduct any outstanding debt to them from this amount before we pay it to you.”

Retirement annuities like Old Mutual are unable to assist with these issues, and members will have to go directly to SARS with their complaints. 

Acton explained that the other challenge is that they will not even know the tax outcome before submitting the claim to SARS.

“We can’t tell you that in advance. We’ll only find that out when we apply for a tax directive, and once we apply for a tax directive and we receive it, it’s final.”

“That’s why we’ve said all along to members: if you’re uncertain about your tax status or if you’ve got outstanding debt, go online and check with SARS first before you try and submit a claim.”

This is “because you could have the situation where your whole withdrawal amount is actually taken due to outstanding tax amounts.”

However, even where members are able to make a successful withdrawal, she warned against doing so except in cases where it is absolutely essential. 

“There’s this perception that I need to come and get it now, or it’s going to fall away, which is absolutely incorrect. This is part of your retirement funding, so if you don’t access this money, it remains invested, and it stays there till you reach retirement.”

“The first thing is to make sure you assess whether you really need it and what you’re going to use it for. The second thing is to remember that you’re borrowing from your future.”

For instance, withdrawing R30,000 today isn’t just losing that amount; it also includes the investment returns you would have earned over time.

Always assess your financial situation carefully, and if you’re uncertain, it’s a good idea to consult a financial advisor first.

Acton also said that Old Mutual has noticed that many people are rushing through the claim process, often providing incorrect or incomplete information. 

Take your time to ensure that all the necessary details, such as your tax number, bank account, and income information, are accurate before submitting your claim.

“There’s absolutely no rush, there’s no cut-off. This is now the new way retirement funds work.”

Going forward, members will be able to withdraw whatever is in their savings pot at any time, and it won’t be capped at R30,000. 

“So rather wait until you have an absolute emergency that you need that money in order to be able to access it than rush and now and find you have a real emergency in a few months time and then there isn’t much there.”