A considerable number of retirement fund members in South Africa who opted to withdraw funds from their savings under the two-pot retirement structure were taken aback by the tax implications, as indicated by a survey carried out by the personal finance platform JustMoney.

The participants indicated that the taxes imposed came across as “unfair” since the South African Revenue Service (Sars) seemed to “take everything.”

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Read: No tax registration, no two-pot withdrawal – Sars

Despite extensive awareness initiatives through media and communications from retirement funds, a significant number of members appeared to lack a thorough understanding of the taxes incurred from withdrawing their funds.

Prior to the launch of the two-pot system on 1 September 2024, members were cautioned that accessing funds from the savings pot would be “an expensive route” due to the significantly higher marginal tax rate applied to these withdrawals.

Read:
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Eye-watering taxes await those who withdraw funds under two-pot

There is a clear difference between the marginal tax rate applied to the two-pot system and the earlier tax rate associated with early retirement fund withdrawals.

The marginal tax rate is ‘progressive’

During parliamentary discussions and stakeholder meetings prior to the enactment of the two-pot system, the increased marginal tax rate faced criticism, particularly from the Congress of South African Trade Unions (Cosatu), which advocated for the retention of previous tax schedules.

Nonetheless, the National Treasury defended its decision to implement the marginal tax rate, emphasizing that it was not aimed at increasing government revenue but rather designed to be “progressive,” benefiting members with low or no income.

For instance, under the old framework, withdrawals from retirement savings over R27,500 attracted a minimum tax rate of 18%, regardless of the member’s income.

Conversely, under the two-pot system, the withdrawal amount from a member’s savings component is counted as part of their total income.

This arrangement means that individuals with little or no income face no tax on their withdrawals, while those earning higher incomes are subjected to higher tax rates.

The tax revenue generated from the two-pot system is projected to exceed previous estimates of R5 billion. During the Medium-Term Budget Policy Statement in October, Sars reported that R7.2 billion had already been collected in tax payments, marking a beneficial increase for the government.

Additionally, Sars is recovering outstanding taxes from two-pot claimants, resulting in scenarios where fund members receive very little or nothing after submitting withdrawal requests.

Withdrawal process

The survey results shared at the start of December highlighted the financial stress faced by consumers: 24% classified their financial condition as “poor,” 43% as “average,” and only 11% as “excellent.”

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The highly anticipated two-pot retirement structure was launched at the beginning of September.

Under the revised framework, a retirement fund member’s contributions are divided into three components: a savings pot comprising one-third of retirement savings (which can be accessed once per tax year), a retirement component consisting of two-thirds that must be preserved and converted into an annuity at retirement, and a vested pot made up of contributions made before 31 August.

Mixed reactions

Of the 6,252 participants in the JustMoney survey, 57% conveyed that they felt “comfortable” accessing funds from their savings component, while 29% voiced concerns about the repercussions for their long-term savings.

Nearly half of the respondents contemplated making withdrawals, although 23% expressed hesitance, worrying about the potential impact on their future retirement.

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Spending trends

Sars reported on 19 November that South Africans had withdrawn just over R35 billion from their savings pots since early September.

This amount is likely to have increased owing to the typical rise in expenditure during Black Friday at the end of November and throughout the holiday season.

Further withdrawals are anticipated as the new school year approaches, when parents will need to cover school fees and purchase uniforms and supplies.

The JustMoney survey allowed multiple selections from participants considering a withdrawal from their savings pot.

Here are their responses:

  • 79% intended to pay off debts;
  • 10% aimed to “treat” themselves;
  • 8% indicated they would spend it as they wished; and
  • 15% reported “other,” specifying they would use the funds for essential needs such as school fees, uniforms, and books, while others indicated plans for home renovations, starting a business, or covering medical expenses.

Discovery reported at the end of September, one month into the two-pot system, that two in ten of its members who withdrew funds planned to allocate these for educational expenses.

However, most of the 17% of Discovery claimants who indicated “other” as their withdrawal reason suggested it was primarily for “home improvements and renovations.”

Read:
The two-pot lid is lifted – providing for education is a priority
Why 22% of Discovery members have withdrawn money under the two-pot

According to the JustMoney survey, 30% of participants reported they had already initiated a withdrawal.

Among those who made withdrawals, 23% found the process to be quick and easy. In contrast, 7% of those who withdrew expressed frustration with “unprofessional staff” and delays in processing and payment of claims.

Sarah Nicholson, operations manager at JustMoney, notes that many South Africans see the two-pot system as a viable approach to balance their immediate financial needs with their long-term retirement goals.

For some retirement members, the ability to access a portion of their savings provides increased financial flexibility and may even encourage them to save more, she adds.

Taxes … and administrative fees

An important issue expected to attract attention in the new year involves the administrative fees assessed by fund administrators for withdrawals under the two-pot system.

The Financial Sector Conduct Authority (FSCA) has stated it is identifying firms that impose excessive transaction fees and will require justifications for those charges.

Keystone Actuarial Services, a consultancy firm based in Johannesburg, previously indicated that collectively, the administrative fees for withdrawals could range from R640 million to R1.25 billion between 1 September 2024 and 28 February 2025, representing a “material windfall” for retirement funds and/or administrators.

The industry has defended its position, arguing that significant resources were spent in preparation for the two-pot system, including the establishment of call centers, training personnel, and upgrading IT systems, alongside ongoing operational costs under the new paradigm.

For example, Alexforbes noted during the filing of its interim results that technology expenses rose by 13% year-on-year due to costs associated with the implementation of the two-pot system, which encompasses software, licensing fees, and an increase in outsourced services.

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