Despite all of the articles written explaining the new two-pot retirement system, there still seem to be some common misunderstandings around the system.
Confusion on how much you can withdraw each year
Many people confuse the R30 000 limit on the seeding capital with the annual amount they can withdraw each year.
The seeding capital (10% of the value of your fund to a maximum of R30 000) that is transferred to the savings pot is a once-off event. Members can leave these funds to grow, or they can withdraw the funds.
As a completely separate funding mechanism, from 1 September 2024, one-third of a member’s monthly contribution will be allocated to the savings pot. The member is allowed to withdraw the funds from the savings pot once a year.
Let’s pretend for a moment that there was no seeding capital and assume you contribute R3 000 a month to your retirement fund. Of that, R1 000 (one-third) would be paid into your savings pot. After 12 months the savings pot would have accumulated R12 000 (R1 000 x 12 months) plus any growth in the fund.
If you chose to withdraw the funds a year later, there would be an amount of R12 000 plus growth available to withdraw. If you did not withdraw, but five years later faced some sort of emergency event for which you needed to draw on these funds, the savings pot would have accumulated 60 months of contributions (60 x R1 000) equal to R60 000 plus any growth.
You would be entitled to withdraw the full value of your savings pot with no limit on the maximum amount. The only restriction is that you may not withdraw less than R2 000 from your savings pot.
The investment value of the savings pot can change
As Alexander Forbes explains, your vested pot, savings pot and retirement pot are all invested in the same way for long-term growth. This means that the balance of each pot can go up and down every day depending on how the investment market is doing.
On 1 September 2024, the number of units transferred to the savings pot (the seeding capital) was equal to 10% of your fund value (or R30 000), but this can increase or decrease in value based on market movements. If the market goes down over the month of September, your savings pot value could be less than R30 000 on 1 October.
It is a reminder that these funds really are for the long term and should not be regarded as an annual savings account to be withdrawn.
You are not taxed twice
Many people have expressed anger that their savings pot withdrawals are being taxed. SARS Commissioner Edward Kieswetter explains that contributions made to a pension or retirement fund were not taxed at the time of payment to the fund, but tax was deferred to the time the person retires.
In addition, there is no tax on the growth of funds in a retirement fund such as capital gains tax or dividend tax. However, because you did not pay tax on the contributions and benefited from a lower tax rate due to your contributions, when you make an early withdrawal, that money will be subject to tax at your marginal tax rate.
If SARS did not tax early withdrawal, then it would create a tax loophole where people could reduce their tax liability by contributing to a retirement fund and then withdraw the funds tax free.
When SARS can withhold unpaid taxes
If you owe SARS money, this tax debt will be added to the tax on withdrawal from the savings pot.
However, SARS has confirmed that this will not apply to anyone who has a payment arrangement in place with SARS to settle the debt. The debt repayment agreement will be upheld and the withdrawal will not be used to fund the tax debt. A tax debt that has been deferred will also not be deducted.
This article first appeared in City Press.
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