By Erica-Anne Strydom, Business Development Consultant at Sovereign Trust SA

The ‘two-pot’ retirement system came into effect on 1 September 2024, with the South African Revenue Service (SARS) saying a total gross lump sum of R21.4 billion has been paid out to taxpayers, thus far. Overall, the system aims to enable South Africans access to a portion of their retirement savings, while preserving the bulk of the savings to help ensure that they can still afford to retire when the time comes.

However, any savings that are withdrawn from retirement savings must be declared to the SARS as gross income and will be taxed accordingly – so it is critical to understand these tax implications before deciding to withdraw from your retirement annuity, or your pension or provident fund.

Personal income tax implications

At a micro level, the immediate tax impact may be low for some. This group includes those whose income is below the annual tax threshold or who are in a lower tier tax bracket. In other words, those who don’t earn enough to qualify for income tax, or who pay very little tax because they do not earn a lot. The danger here is that the addition of the withdrawn funds may mean that they will become liable for income tax, or it may push them into a higher tax bracket.

In fact, everyone who withdraws from their retirement savings runs the risk of being pushed into a higher tax bracket, irrespective of how much they earn.

Once the additional income has been declared, SARS will issue a simulated tax directive, which quantifies the difference between the tax payable on your standard income, and the tax payable on your standard income plus the savings pot withdrawal. This directive will also take all unpaid taxes into account.

If, after receiving this directive, you proceed with the withdrawal, SARS will issue a final directive and your decision cannot be cancelled. The applicable income tax amount will be automatically deducted before your withdrawal is paid out to you.

Macroeconomic implications

The ‘compulsory preservation’ aspect of the system could contribute to raising South Africa’s low savings rate which could, in turn powerfully impact the domestic economy and local markets in the years ahead, ultimately benefitting all South Africans.

In short, a low savings rate implies a low investment rate unless foreign savings can be imported. However, running the current account deficit necessary to do this has a major drawback: Most foreign capital inflows to South Africa are used to invest in bonds or equities on the JSE, but these can easily and quickly be reversed. There is very little sustainable foreign direct investment.

You could… But you probably shouldn’t

By offering short-term flexibility and long-term stability, the two-pot system can enhance your overall financial wellbeing both when it comes to immediate, once-off financial responsibilities, and at retirement. But, always remember that an investor’s greatest ally is time; funding short-term needs from your retirement savings will have the net effect of eating into the compound interest that would otherwise accrue.

A decision to withdraw funds from your retirement savings should only be taken after consulting with a specialist who is able to present a 360-degree view of the advantages and drawbacks, potentially factoring in increased contributions going forward to help replenish the capital amount that will be depleted.