With the implementation date for the two-pot retirement system less than a month away, it is essential for people to understand how this new system works and its tax implications.
On June 1, 2024, President Cyril Ramaphosa signed the Revenue Laws Amendment Bill of 2023 into law, establishing the two-pot retirement system.
The new retirement system will be implemented on September 1, 2024.
Here is a look at how the two-pot retirement system will work:
– Vested pot: all retirement contributions made before September 1, 2024 will sit in this pot.
– Savings pot: from the implementation date, one third of all retirement contributions will go to this pot
– Retirement pot: following September 1, 2024, two thirds of all retirement contributions will be in this pot.
Belinda Sullivan, Financial Services Head: Strategic Consulting at Alexforbes, provides an example to illustrate how retirement contributions will be split under the new system.
If you are contributing R3,000 towards retirement, R150 can be deducted for fees, leaving a total contribution of R2,850. From this amount, R950 will go to the savings pot, while R1,900 will be allocated to the retirement pot.
Additionally, contributors should be aware that, starting September 1, 2024, a one-off transfer of R30,000 will be moved from the vested pot to the savings pot.
Making a withdrawal
Rita Cool, Head of Individual Consulting Strategy at Alexforbes, provides an example of how the withdrawal process works:
For a minimum withdrawal amount of R2,000, the anticipated tax is R720 (at a 36% tax rate), leaving R1,280 in cash after tax.
If the withdrawal amount is R30,000, the tax would be R10,800 (also at 36%), resulting in an after-tax amount of R19,200.
Cool said: “These values will be confirmed by SARS and as the legislation is currently not 100% finalised, this is our best interpretation of the current information available.”
This also does not take into account any transaction fees that a service provider might charge. The fee is deducted first and then the tax is calculated on the after fee amount.
Now that we know how the retirement contributions are split and how the withdrawals will be taxed, it is essential that you understand the tax implications of making a withdrawal.
Paying the taxman first
Nashalin Portrag, Head of FundsAtWork and Distribution at Momentum Corporate, stated that any arrear tax will be deducted by SARS before any benefit is paid out from the savings component.
“Fund members need to be aware that before any payment will be released, the fund administrator will need to apply to SARS for a tax directive,” John-Paul Fraser, tax attorney, Tax Consulting SA.
“Where the taxpayer has an outstanding tax debt with SARS, the fund administrator will be issued with a notice to pay this debt from the withdrawal amount first and only pay the taxpayer the balance,” said Fraser.
What rate will the withdrawal be taxed
Withdrawals from the savings component before to retirement will be taxed at marginal income tax rates, according to Portrag.
Fraser said that this means that any withdrawal will be taxed in the same manner as a salary or other similar income.
The tax on the withdrawals will be withheld by the respective fund administrator and paid directly over to SARS.
Tax bracket
Fraser noted that withdrawing from the savings pot can indeed push the taxpayer into a higher tax bracket.
“This is the case as the withdrawals from your savings pot are seen as income in the same light as that of remuneration income,” Fraser said.
According to Portrag, if a member makes a withdrawal from the savings component before they retire is added to their annual taxable income.
“If the member’s earnings prior to the withdrawal were on the upper end of a tax income bracket, it is possible the withdrawal amount being added to the annual earnings pushes the member into a new tax bracket,” Portrag said.
“If, however, the total annual income remains within a tax bracket, there will no change to the marginal tax rate applied despite making a withdrawal from the savings component.”
Here is some other important information that you need to know about the two-pot retirement system:
– You can only make one withdrawal from the savings pot in a tax year, a SA tax year runs from 1 March to 28 February.
– The minimum withdrawal that an be made is R2,000.
– There is no maximum withdrawal amount set for fund members, however the withdrawal will be subject to what has accrued in the savings pot.
– People who were 55 on the March 1 2021 are exempt from the new rules because they are close to retirement therefore the new rules might negatively impact their retirement planning. The exemption from the two-pot retirement system can ensure that their benefits remain protected.
– Too many withdrawals from the savings component will ultimately be detrimental to the member’s final retirement outcome since regular withdrawals means less there will be less funds available at retirement.
Warning
Sullivan is warning retirement fund contributors from resigning now and taking all of their money because they don’t want to be a part of this new system.
“We find that there are members that are wanting to withdraw from their retirement funds now to avoid being part of the two-pot retirement system because they think that they will lose their rights on this existing money,” Sullivan said.
“It is very important that they understand that all rights that they have had will continue into the future, that doesn’t change. It’s only how their new money from September 1, will be allocated on their behalf that changes. Any existing rights remain and continue into the future as well as earn investment return.”
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