Two-pot retirement system: SA workers are the losers with tax

South African workers are the losers in the two-pot retirement system that will be implemented from Sunday, 1 September, as they will pay more taxes and deplete their retirement savings in the process, with not much money to use for paying off their debt.

The Revenue Laws Amendment Bill, signed into law by President Cyril Ramaphosa in June this year, enables pension fund members who are strapped for cash to access a portion of their pension fund savings before retirement. 

The amendment law introduces the two-pot retirement system aimed at tackling the concerns about South Africans’ lack of preserving their retirement savings before they retire, as well as their households’ inability to access their retirement funds when they are in financial distress.

Pension fund members will be able to access a third of their pension savings at any time before they reach retirement age, while the rest will remain untouched until retirement.

The reform strives to strike a balance between long-term security and immediate needs in the face of the country’s current economic unpredictability.

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Tax implications if you withdraw some of your savings

“While I of course understand that there can be tangible short-term benefits for workers, especially those who are among the millions of South Africans currently drowning in debt, there are tax implications that I believe many, if not most, South Africans are unaware of.

“It is crucial that people understand these, as well as the long-term impact of withdrawing their savings at retirement and the income those savings will provide,” Neil Roets, CEO of Debt Rescue, says. 

“Being taxed at the tax bracket rates, which will apply to withdrawals, is very different from how cash lump sums are currently taxed at retirement and consumers should consider the implications before any withdrawals are made,” says Roets.

“In addition, withdrawals from the savings pot will be taxed at the marginal rate, which is significantly higher than the existing tax rate applicable to early retirement fund withdrawals.”

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Beware: withdrawal can push you into higher tax bracket

Fiscal financial adviser Lana Visser agrees. She says the tax consequences of withdrawals from the savings component of a retirement fund are that it will be added to your taxable income and taxed at your marginal tax rate.

It can also move you into a higher tax bracket. For example, Visser says, someone who currently earns R25 000 a month and whose savings component has grown to R80 000, finds himself in financial trouble like many other South Africans and decides to withdraw it all to help make ends meet.

This will increase his taxable income for the year by R80 000, moving him into a higher tax bracket. Is he prepared for this?

Roets says it is vital that South Africans take the time to learn more about the two-pot retirement system so that they can make an informed decision when withdrawing from their savings pots.

National Treasury said previously that it is anticipating a tax windfall of about R5 billion when the two-pot retirement system is introduced. Roets says this ‘windfall’ comes at a high cost for retirement fund members who might not realise how much more tax they will pay for early access.

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Experts question introduction of marginal tax rate

Subedra Reddy, executive head of actuarial services at employee benefits firm NBC Holdings, is an industry expert who questions the decision of the National Treasury to introduce a marginal tax rate.

She says if someone who earns an annual salary of R300 000, for example, resigns from his job and decides to withdraw his total retirement fund credit of R50 000, he will pay 18% tax according to the current withdrawal table, which amounts to R4 050, as the first R27 500 is tax-free and the balance is taxed at 18%.

However, if he decides to withdraw R50 000 from his savings pot under the two-pot retirement system, he will incur 26% tax, amounting to R13 000 as the R50 000 withdrawal from his savings pot gets added to his taxable salary. His new taxable salary is now R300 000 + R50 000 = R350 000 and the marginal tax rate for this amount is 26%.

“Any way you look at it, the contributing taxpayer comes out the loser,” says Roets.

“Yet, my expectation is that millions of retirement fund members who are buried under a mountain of debt incurred due to relentless cost-of-living increases, see no other way out of their predicament, besides taking out high-interest loans.

“They will strongly consider accessing their savings pot intended for their future, notwithstanding the tax impact. Understandably, consumers do not always consider the full consequences of such a decision, especially if they are under financial stress,” Roets says.

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Seek advice before you withdraw

“That is why it is important to seek advice before making decisions that can very well change the course of your life.  A withdrawal from your retirement savings is right up there with those big decisions.” 

Roets points out other benefits that fund members will forfeit when making an early withdrawal, such as the value of compound interest, the tax benefit of contributing to a retirement fund and the return on their investment in the future, which will significantly affect their quality of life in their golden years. 

He also highlights the plight of the alarmingly high number of South Africans who cannot afford to contribute to a pension fund or to put away money towards a saving plan, substantiated in a recent Debt Rescue survey, where 59% of people polled admitted to being unprepared, with no savings or plan for retirement.