Ahead of the implementation of the two-pot retirement system on 1 September, many people are surprised to discover how much tax they will pay on any withdrawal of funds from their new savings pot.

Many are planning on withdrawing the once-off seeding capital that will be transferred from their vested (existing) funds to the savings pot. SARS expects to collect around R5 billion in additional tax revenue this tax year from people who opt to withdraw this seeding capital.

If you are in a higher income category, you can expect to pay more tax on withdrawals from your savings pot. For example, someone withdrawing R30 000 who has a marginal tax rate of 41% may pay around R13 500 in tax, only receiving a net payment of R16 500.

Longer-term consequences

Less attention has been given to the longer-term consequences of the changes to the tax regime on withdrawals, especially when members resign.

A new tax regime will apply to withdrawals from your savings pot: these withdrawals will be considered part of your renumeration, and will therefore be added to your taxable income, thereby increasing the amount of tax you pay on withdrawals.

Currently, if you resign and withdraw your retirement funds, you are taxed according to the withdrawal tax table:

So you could withdraw up to R726 000 and only pay 18% tax.

This tax regime will continue to apply to your vested pot – those funds accumulated up to 31 August 2024. However, a new tax regime will apply to withdrawals from your savings pot. These withdrawals will be considered part of your renumeration, and will therefore be added to your taxable income. This will increase the amount of tax paid on withdrawals.

An example

Let’s say you have an annual taxable income of R300 000 and contribute R3 000 a month to your retirement fund.

You start contributions on 1 September 2024 and resign ten years later, on 1 September 2034. Assuming a fund return of 10% per annum, you have the following retirement benefits:

• Total fund value: R614 000
• Retirement pot (two thirds): R409 334
• Savings pot (one third): R204 666

On resignation, you are not allowed to access your retirement pot, but you choose to withdraw the full R204 666 accumulated in your savings pot.

If the previous withdrawal tax tables had applied to the R204 666 withdrawal, you would have paid R31 890 in tax, leaving a balance of R172 776.

However, under the new dispensation, the savings pot withdrawal is added to your taxable income for that year, and taxed accordingly. If, on resignation, your taxable income was R300 000, the savings pot withdrawal of R204 666 would be added to your taxable income.

This now brings your taxable income for that year to R504 666. This has moved you from a 26% marginal tax rate to 31% marginal tax rate.

Your annual tax bill will increase from R41 797 to R101 773 – which means that withdrawing from your savings pot has cost you an extra R59 976 of tax. You have effectively reduced the value of your savings pot from R204 666 to R144 690.

In summary:

• Amount withdrawn from savings pot: R204 666
• Taxable income for the year: R300 000
• Tax payable under the old tax system: R31 890
• Tax payable under the new tax system: R59 976

In this scenario, you would pay R28 086 more in tax on the withdrawal under the new regime.

New tax regime only applies to new contributions

Before you rush to resign before 1 September to save tax, remember that any withdrawal from your vested pot (ie, your fund value before 1 September 2024) would still be taxed according to the previous withdrawal tables. The new regime only applies to new contributions.

If you had accumulated retirement funds prior to the 1 September, these funds – plus growth – would be ring-fenced and any withdrawal of these funds anytime in the future would be taxed according to the previous withdrawal tax tables.

The other implication to consider is that while you receive a tax deduction each year on your retirement contributions, depending on the increase in your salary over time (and therefore the increase in your marginal tax rate), you could end up paying more tax on withdrawals from your savings pot than the tax deduction you received.

This makes withdrawing funds prior to retirement very expensive in terms of tax. So everyone should think extremely carefully about making withdrawals, and only do so as an absolute last resort.

Withdrawing from your savings pot in order to fund emergencies or an improved lifestyle could be one of the worst financial decisions you could make. Rather focus on having separate emergency or contingency funds and keep retirement funding for retirement.

This article first appeared in City Press.