Roughly R60 billion has been withdrawn since South Africa’s new two-pot retirement fund system was applied a 12 months in the past. In a latest briefing to the Nationwide Council of Provinces, Nationwide Treasury stated the introduction of the two-pot system has been largely profitable, enhancing public engagement with retirement funds, exposing non-compliance by some employers, and making certain higher long-term retirement financial savings.
Whereas the brand new system faces some teething points, together with some administrative hurdles, monitoring and analysis mechanisms are being utilized to make sure its effectiveness. The Income Legal guidelines Modification Invoice of 2025 supplies for additional corrections and technical modifications to the system.
Insights from the First 12 months
This primary 12 months has provided some attention-grabbing insights into how members are responding to the brand new guidelines and what challenges nonetheless should be addressed. Preliminary considerations about widespread, frivolous withdrawals haven’t materialised to the extent that many anticipated with information indicating that the majority withdrawals are getting used to scale back debt, pay for training and put down deposits on second hand autos.
Some of the hanging findings is the excessive charge of repeat withdrawals. Of those that withdrew funds when the brand new guidelines got here into impact, usually greater than 80% are repeat withdrawers, accessing their financial savings pot a number of instances. This means {that a} phase of the inhabitants is counting on these withdrawals yearly, seemingly for ongoing monetary pressures slightly than one-off emergencies. Some appear to be utilizing the withdrawals to pay down casual debt, comparable to payday loans, with the debt cycle usually restarting the next month.
The truth that most members are utilizing funds for necessities means that the intensive communication efforts by monetary establishments and the federal government have been efficient. Members seem to know the intense implications of withdrawals, and a way of warning appears to have set in, with most individuals avoiding utilizing the funds for luxuries.
Tax Implications caught many unaware
Many retirement fund members who made early withdrawals have been shocked by the tax implications after failing to understand that withdrawals are taxed at their marginal tax charge, and that any excellent SARS debt – like unpaid PAYE – shall be seized from the withdrawal quantity. In response, SARS has made a web-based tax calculator obtainable on its web site to calculate how a lot tax shall be due based mostly on the quantity being withdrawn. Nationwide Treasury studies some hesitation round utilizing the calculator as a result of considerations about offering private data to SARS. Future iterations of the calculator might subsequently exclude the necessity for private particulars in an effort to enhance public confidence and understanding.
Nationwide Treasury has opposed requires financial savings withdrawal advantages to be tax free, arguing that contributions to retirement funds are already tax deductible. Whereas low-income earners have restricted tax implications, Nationwide Treasury has acknowledged that some people shall be pushed above their tax-free threshold once they make a withdrawal, thus making a tax legal responsibility. For instance, if someone incomes R80 000 yearly withdraws R20 000, it should push their taxable earnings above the tax-free threshold.
What must occur subsequent
Probably the most vital lesson but to be totally realized will come when the primary cohort of members who’ve made withdrawals from their financial savings pot reaches retirement age. They could be shocked to find precisely how a lot their tax-free money lump sum at retirement has been diminished by their financial savings pot withdrawals.
A person who spends 40 years saving for retirement, beginning at age 25 with a pensionable wage of R20 000 could have a retirement fund valued at R5,182 million (in in the present day’s cash) at age 65 if they’ve made no withdrawals. Nevertheless, in the event that they withdraw their total financial savings pot annually, the worth of the funding at age 65 shall be a considerably decrease R3.443 million.
What occurs to individuals nearer to retirement? A 55-year previous particular person who elected to choose in to the two-pot regime, with R2 million of their vested pot and who earns a month-to-month earnings of R49 000, will retire at 65 with R4,411 million in the event that they make no withdrawals. In the event that they withdraw their total financial savings pot annually, they are going to retire with R3,969 million.
For youthful individuals particularly, the implications of withdrawals are nonetheless years away, and should not but be totally comprehended.
An vital dialogue that should occur is whether or not members ought to have a unique funding technique for his or her financial savings pot in comparison with their retirement pot. Whereas most funds at the moment keep a single, long-term technique for each pots, this might not be appropriate for members who intend to make common withdrawals from their financial savings pot. For these people, a much less unstable, money-market-type funding technique may be extra acceptable. The present complexity and a scarcity of administrative functionality amongst some main fund directors have to date hindered this dialog.
Whereas communication and training should proceed, it must evolve. The main focus ought to shift from explaining the foundations of the two-pot system to demonstrating the implications of withdrawals by way of useful situations. Utilizing examples that present the long-term influence on retirement financial savings shall be essential to serving to individuals make knowledgeable choices.
Given the complexity of the problem, the significance of economic recommendation shouldn’t be underestimated. Recommendation must be accessible to all members, not simply the rich. Fund trustees have a vital position to play right here. Some funds have efficiently applied techniques the place they endorse particular monetary advisers or advisory companies. This creates a layer of governance and accountability, making certain members obtain sound recommendation. Whereas this provides a brand new accountability for trustees, it’s a mandatory step to guard members and mitigate the dangers inherent within the two-pot system.
Whereas the primary 12 months has been a studying curve, the muse of the two-pot system appears to be holding. The problem now lies in anticipating future pitfalls and constructing a help construction that empowers members to navigate their retirement journey with confidence and foresight.
