South Africa’s new Two-Pot Retirement System, effective from 1 March 2024, introduces a significant change to how retirement savings can be accessed. It offers more flexibility by allowing you to withdraw part of your retirement savings before you reach retirement age, while still preserving the majority of your funds for the future.
The system was designed to balance long-term savings goals with the need for emergency liquidity. This is especially useful for individuals who may face financial hardship before they retire. However, with this increased access comes several important tax considerations that can impact how much you ultimately receive.
In this article, we will explain:
How the Two-Pot system works,
How withdrawals from the accessible Savings Pot are taxed,
Whether you need a tax directive to access your savings, and
What you need to know about SARS withholding funds due to unpaid taxes.
The Two-Pot System: How It Works
Under the new system, your retirement contributions will be split into two distinct “pots”:
Retirement Pot (Preservation Pot): Two-thirds (66.67%) of your contributions will be allocated to this pot, which is preserved strictly for retirement. These funds cannot be accessed before retirement age, ensuring that a large portion of your savings remains secure for your future.
Savings Pot (Accessible Pot): The remaining one-third (33.33%) of your contributions will go into this pot, which you can access before retirement. Withdrawals from this pot are allowed once a year, subject to a minimum withdrawal amount of R2,000. This feature provides flexibility in case you need funds for an emergency or other financial need before retirement.
However, any withdrawals from the Savings Pot are subject to tax, and this is where things can get complicated if you don’t plan carefully.
Let’s dive into the taxation rules for the Savings Pot and what you should know about obtaining a tax directive, as well as potential issues with SARS withholding your savings if you have outstanding tax liabilities.
1. How Are Withdrawals Taxed?
The Savings Pot allows you to access up to one-third of your retirement contributions, but any amount you withdraw will be taxed according to the withdrawal tax tables. Here’s how the tax works:
Savings Pot Withdrawals (Pre-Retirement): Every time you withdraw from the Savings Pot, it’s considered a retirement lump sum withdrawal, and it will be taxed based on the cumulative amount of all your previous withdrawals from retirement funds.
Tax Rates between 1 March 2023 and 28 February 2025: The tax rates for withdrawals from the Savings Pot follow the Withdrawal Lump Sum Table, which is as follows:
R0 to R27,500: 0% tax (tax-free)
R27,501 to R726,000: 18% on the amount over R27,500
R726,001 to R1,089,000: R125,730 + 27% (over the amount of R726,000)
Above R1,089,000: R223,740 + 36% (over the amount of R1,089,000)
Each time you make a withdrawal, the tax rate the tax bracket applies to the cumulative withdrawals you have made over a lifetime. This means SARS looks at all prior withdrawals (including from provident, pension, or retirement annuity funds) to determine the applicable tax bracket for your next withdrawal. So, multiple withdrawals could push you into a higher tax bracket over time.
2. Do You Need to Apply for a Tax Directive?
Every time you withdraw from the Savings Pot, a tax directive must be obtained from SARS. The tax directive tells the fund how much tax to withhold from the amount you’re withdrawing, ensuring that the correct amount is paid to SARS upfront.
It’s important to note that you do not need to apply for the directive yourself. The retirement fund administrator will handle this process, but it’s essential to understand that SARS will use the directive to collect any taxes owed on the withdrawal.
3. What If You Have Outstanding Taxes?
One of the biggest concerns we’ve heard is that SARS could withhold your Savings Pot withdrawals if you have outstanding tax debts. This can happen in the following scenarios:
SARS Withholding Funds: If you owe SARS any taxes, including unpaid income tax, VAT, or any other tax liability, SARS has the legal right to withhold a portion of your withdrawal until your outstanding tax debt is settled.
SARS may not release the full amount you are withdrawing from your Savings Pot if they detect tax arrears on your account.
Tax Debts Offset: When the tax directive is requested for your Savings Pot withdrawal, SARS can offset any outstanding tax debts against the withdrawal. This means that, in some cases, the entire amount you withdraw could go towards settling your tax debt, leaving you with little or no payout.
Conclusion: Plan Your Withdrawals Strategically
The new Two-Pot system offers flexibility, but it’s crucial to carefully manage how and when you access your Savings Pot. While early withdrawals are now possible, it’s important to consider the long-term tax implications:
Tax Benefits of Waiting Until Retirement
By waiting until retirement to access your Savings Pot, you can take advantage of more favourable tax treatment:
Retirement withdrawals are taxed according to the retirement tax table, which is generally more beneficial than the withdrawal tax table used for early withdrawals.
You could potentially benefit from a tax-free portion of up to R550,000 at retirement, compared to only R27,500 for early withdrawals.
This means that by withdrawing early, you might forfeit a tax benefit on up to R522,500 (R550,000 less R27,500).
Considerations for Early Withdrawals
If you do decide to make early withdrawals:
Carefully assess your overall tax status to minimise liabilities and avoid issues with SARS.
Ensure there are no outstanding tax issues that could lead to delays or withholding of funds.
We strongly recommend reviewing your financial situation and long-term goals before making any withdrawals. If you have questions about tax compliance, the tax directive process, or how to navigate the Two-Pot system without triggering unnecessary tax penalties, please reach out to our team. We’re here to help you understand your tax obligations and make informed decisions about your pension fund under South Africa’s new rules.
