Understanding the Two-Tier Retirement Pot System in South Africa and the Tax Implications of Withdrawals
/As you continue to plan for your retirement, it's crucial to understand the two-tier retirement pot system recently implemented in South Africa and how withdrawals from your retirement fund can affect your tax obligations.
Starting September 1, 2024, contributions will be split into savings and retirement components at a ratio of one-third and two-thirds, respectively.
The two-tier retirement pot system was introduced in South Africa to provide greater flexibility and security for individuals when they retire. Under this system, your retirement savings are divided into two separate "pots":
1) The Savings Pot: This portion allows for limited pre-retirement access to your funds. You can withdraw from this pot under specific conditions, such as financial hardship, but these withdrawals are subject to tax.
2) The Retirement Pot: This pot is preserved for retirement, and you can only access it once you reach retirement age or under certain circumstances such as permanent disability or emigration. Withdrawals from this pot are also subject to tax, but the rates and conditions differ from those of the savings pot.
When you withdraw money from your retirement fund, SARS will treat these withdrawals as taxable income, and they will be subject to a specific tax rate depending on the pot from which the money is withdrawn and your overall financial situation.
Here is a calculator from SARS to help you understand.
Withdrawals from the savings pot are taxed according to your applicable tax rate and your retirement fund will get a tax directive to calculate the correct tax rate it should pay over to SARS.
Withdrawals from the retirement pot at retirement or due to other qualifying events (like permanent disability or emigration) are taxed according to the "Retirement Lump Sum Benefits Tax Table." The rates as of the 2024 tax year can be found here.
0,000: No tax is payable.
R550,001 to R770,000: 18% of the amount above R550,000.
R770,001 to R1,155,000: R39,600 + 27% of the amount above R770,000.
Above R1,155,000: R143,550 + 36% of the amount above R1,155,000.
For example, if you retire and withdraw R800,000 from your retirement pot, the tax calculation would be:
1) Subtract the tax-free portion: R800,000 - R550,000 = R250,000.
2) Apply the 18% tax rate to the amount above R550,000: R250,000 * 18% = R45,000.
Thus, the tax payable on an R800,000 withdrawal from the retirement pot would be R45,000.
How SARS Will Tax Extractions
SARS aggregates withdrawals to determine the tax payable, meaning all withdrawals over your lifetime from any retirement funds (including pension, provident, or retirement annuity funds) are added together to calculate the applicable tax rate.
This aggregation applies to withdrawals made before retirement (from the savings pot) and withdrawals at retirement (from the retirement pot).
It's important to note that any withdrawals taken from the savings pot will reduce the tax-free portion available when you retire.
This is because the tax-free amounts are cumulative across all withdrawals and retirement benefits.
Strategies to Minimise Tax on Withdrawals
To optimise your retirement savings and minimise tax liabilities, consider the following strategies:
Plan Withdrawals Carefully: Avoid unnecessary withdrawals from your savings pot to preserve the tax-free amount for retirement.
Utilise the Annual Tax-Free Allowance: If possible, restrict withdrawals to the annual tax-free allowance to avoid incurring taxes.
Consult with a Financial Advisor: Professional advice can help you plan your withdrawals strategically and align them with your overall retirement plan.
As ever, if you have any questions please don’t hesitate to contact us.
