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South African pension fund members who are considering accessing a portion of their retirement savings under the two-pot system must realise that it is a costly way of getting money.
The much-touted two-pot system comes into effect at the beginning of September. Under this system, a retirement fund member’s contributions are divided into a savings component accessible once in a tax year and a retirement component.
For existing retirement fund members, a third component – the vested pot – contains the fund member’s contributions up to 31 August 2024.
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.
Subedra Reddy, executive head of actuarial services at employee benefits firm NBC Holdings, compared the impact of the two tax rates – and the difference is vast.
Reddy uses an example where Mr X resigns from his job and decides to withdraw his total retirement fund credit of R50 000.
Under the current withdrawal table, Mr X will pay 18 percent tax, which amounts to R4 050 (this is because the first R27 500 is tax-free, and the balance is taxed at 18 percent).
However, if Mr X (at an annual salary of R300 000) decides to withdraw R50 000 from his savings pot under the new regime, he will incur 26 percent tax – amounting to R13 000.
This is because 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 the amount is 26 percent).
“So you can see that the tax payable (under the two-pot system) is calculated very differently, even for the same withdrawal amount of R50 000,” says Reddy.
The marginal tax rate (which is applicable to the savings pot under the two-pot system)
The tax hits will continue for those who keep dipping in.
The significant difference in the two tax rates over an employee’s working life is even more glaring, as the following example shows:
Ms Y, aged 20, is a new pension fund member (after the two-pot system has come into effect). She earns R250 000 per year.
Assuming she withdraws all the funds available in her savings pot each year throughout her working life, she will have paid 72 percent more tax under the marginal tax rate compared to the tax rate applicable to early fund withdrawal, says Reddy.
“And if you were to accumulate this difference (with interest) until her retirement age at 60, it would amount to about R1,3 million.”
Is it justifiable?
When the two-pot system was debated in parliament’s finance committee in September 2023, trade union federation Cosatu demanded that the existing, lower tax rate for early withdrawals should apply.
National Treasury however stuck to its guns that withdrawals under the two-pot system would be subject to the significantly higher marginal tax rate.
The imminent withdrawals from pension fund members’ savings pots will be a significant revenue source for the fiscus. – Moneyweb
Online Reporter