The so-called two-pot retirement system will be implemented from 1 March 2024. There is still a lot of confusion around the system and exactly how it will work, and we are awaiting further clarity from Treasury on some of the details surrounding the system.
In the meantime, here are two common reader questions that we can try to answer.
Are contributions still tax deductible?
Allan asks: “Are the total contributions to a retirement annuity still tax deductible post March 2024, considering we will have access to one-third of the contributions post March 2024?”
You will still receive the full tax deduction on any contributions to a retirement fund. This remains at 27.5% of all taxable income (to a maximum of R350 000 per annum).
The reason your contributions remain fully tax deductible is because any withdrawal from the savings pot will be fully taxed at your normal marginal rate. The amount withdrawn will be added to your taxable income for that year.
This could possibly even push you into a higher tax bracket, so it is very important to understand the tax implications of making early withdrawals. Only at retirement would the specific retirement tax tables apply on the savings pot.
Where will the savings pot be invested?
Mabasa asks: “Will the savings pot be invested like the retirement pot or will the one-third sit in cash?”
This is a very important question, especially for those people who have no intention of withdrawing from their savings pot.
Because most people are likely to withdraw each year – despite the advice not to – retirement fund administrators may need to consider keeping these funds in low-risk, cash-like investments.
However, for longer-term investors, if a third of your retirement investment is sitting in cash-like investments, your total return could be lower. This decision will be made at fund level, and we are still waiting for retirement fund administrators to provide their options.
Hopefully all retirement funds will provide an option for the savings pot to be fully invested in longer-term assets for those who do not wish to withdraw.
The other option is that you can transfer your savings pot to your retirement pot. It would then be fully invested, but the downside of this decision is that you would then not have a lump sum to withdraw at retirement as you can only take your lump sum from the savings pot.
Hopefully we will have more insights later this year as to the various options.