Tax rules governing the new Two-Pot system provide for a R550,000 tax-free incentive to delay withdrawals until retirement.
While most withdrawals under the Two-Pot system are not expected to be large amounts, the Fiscus (South African Revenue Service) is nonetheless anticipating a R5 billion revenue windfall from taxing Two-Pot withdrawals in the next financial year. This number indicates that the government expects hundreds of thousands of South Africans to access their retirement savings in the immediate period.
To minimise the long-term negative impact of people depleting their retirement savings for short-term needs, exempting tax on the first R550,000 available at retirement provides a clear incentive for middle and lower-income South Africans to minimise withdrawals from their retirement savings.
Beware of depleting your retirement lump sum
Even before Two-Pot, South Africans struggled to save sufficiently for retirement. Persistently high unemployment, COVID-19, and high inflation pushed saving for retirement down right to the bottom of most peoples' hierarchies of needs.
While Two-Pot ensures that at least two-thirds of all future contributions to retirement funds will be saved, those who eventually make withdrawals from their savings components should consider that they might not have any lump sum available when the time comes to help them transition to retirement.
Currently, members of all types of retirement funds can take at least some of their accumulated savings at retirement as a lump sum, and the first R550,000 of that is tax-free, subject to certain pre-existing conditions. With the balance of their retirement savings, members are required to purchase an annuity which will provide them with post-retirement income.
In the Two-Pot world, the savings component is meant to provide that tax-free lump sum portion when a person retires since it will house one-third of the members' accumulated retirement savings in the Fund. But this will be reduced by withdrawals, resulting in a smaller amount available as cash lump benefits for members of retirement funds. Many people have used this lump sum in the past to settle debt to help them transition from a life of earning a salary every month to a potentially reduced income in retirement paid from post-retirement products such a living or fixed annuities.
This means that people who deplete funds in their savings component once every new tax year, could face the possibility of transitioning to retirement without the necessary financial support.