[Rek jou cheque] Moet nie innie potte krap nie: Be careful when using ‘two-pot’ retirement scheme
The two-pot retirement system coming into effect on 1 September has South Africans very confused.
People are talking about taking their retirement savings portion and going on holiday, buying new curtains for Christmas and throwing lavish matric ball parties.
People are even considering resigning because they are scared they won’t have access to their money after 1 September.
Ridhaa Damon, Franchise Principal and Financial Advisor at Fairbairn Consult, says: “Please do not resign out of the fear that you will not be able to access your funds after 1 September.
“All the money you have saved up in your retirement savings vehicles prior to 1 September will move into the vested pot and all the old rules and regulations will still apply to it.
“So, whether you resign now or in 10 years’ time, you will still have be able to withdraw those funds if needed.”
The main issues seem to be:
– It’s called the two-pot retirement system, but there are actually three pots. The “Vested Pot”, the “Savings Pot” and the “Retirement Pot”.
– Some people are expecting to get their money – without paying tax on it.
– South Africans are expecting 10% of their current lump sum contribution to be available to them - forgetting that it has been capped at R30 000, before tax. Others are expecting the maximum of R30 000 to be available to them –when they don’t even have the minimum withdrawal limit of R2000 available to them.
– Withdrawals being used for luxuries rather than necessities I think this is a topic which is better explained with examples.
POTS
Anthea from Southfield earns R375 000 a year. She has been religiously contributing towards her pension fund and currently has R200 000 in it. This is what is referred to as the “Vested Pot”. It’s basically everything you currently have in your retirement annuity/provident fund/ pension fund, etc. – up until 31 August 2024.
On 1 September 2024, 10% of the R200 000 (which is R20 000) that is in Anthea’s “Vested Pot” will be transferred into the “Savings Pot”.
It is below the maximum of R30 000 and OVER the minimum of R2000 – so she will be allowed to withdraw the R20 000 or part of it.
As of 1 September 2024, what is left in the “Vested Pot” after the transfer to the “Savings Pot” will be Anthea’s “old” contributions. And that will stay there. She can access it if she is retrenched or resigns, but will pay the applicable taxes and fees.
All contributions after 1 September will be divided into 2 sections – one third will go into the “Savings Pot” and can be accessed once every tax year. And two thirds will go into the “Retirement Pot” which cannot be accessed until Anthea retires.
TAX
Any amount that Anthea takes from her available savings of R20 000, will be taxed at the same rate as what her salary is being taxed.
Here is the SARS tax table which indicates exactly how much anyone will be taxed on their withdrawal:
– If you earn less than R237 000 per year, then you will pay 18% tax;
– R237 101 – R370 500, 26%
– R370 501 – R512 800, 31%
– R512 801 – R673 000, 36%
– R673 001 – R857 900, 39%
– R857 901 – R1 817 000, 41%
– R1 817 001 and above 45%
As she earns R375 000 per year, Anthea will pay 31% tax on what she chooses to withdraw of the R20 000.
Anthea is stressed because debt collectors are calling her every day. She decides to withdraw the maximum that she can (R20 000) but must pay tax on it.
R20 000 – 31% tax (R6200) = R13 800
Anthea’s fund administrator charges a fee of R300.
Anthea doesn’t owe SARS any outstanding penalties or taxes, so she will have R6500 (R6200 + R300) deducted from her R20 000 withdrawal. This means she will “take home” R13 500 of her R20 000.
Down the road from Anthea, lives Shahiem. He earns R700 000 per year. He has R1.5 million in his “Vested Pot” , but the maximum that can go into his “Savings Pot” on 1 September is R30 000, so he decides to draw that.
R30 000 – 39% tax (R11 700) = R18 300
Shahiem’s fund administrator charges R400.
Unfortunately, Shahiem also still owes SARS R5000 in penalties for previously failing to submit his tax returns. This will need to be paid to SARS before Shahiem gets any payout.
So that is R11 700 (SARS tax) + R400 (administrator charges) + R5000 (SARS penalties) adding up to R17 100 which will be deducted from the R30 000.
So in the end, Shahiem will “take home” R 12 900.
Capped limits
Shahiem is obviously not happy with getting only R12 900 from his R30 000 and wants more money from his “Savings Pot”.
He thinks that because he has R1.5 million in his “Vested Pot” 10% of that (R150 000) will go into his “Savings Pot” for him to take from.
That isn’t how it works. Even if you have R10 million currently in contributions in your “ Vested Pot” by 31 August 2024, ONLY R30 000 of that will be transferred into your “Savings Pot” because that is the maximum at which it is capped.
It is a maximum of R30 000 or 10% of whatever you have in your “Vested Pot”... as long as it is less than R30 000.
So if you have R50 000 in total contributions to your “Vested Pot” thus far, only R5 000 will be moved to your “Savings Pot” – and you can draw that, as long as you pay your taxes, any other monies owed to SARS and your administrator's fees on it.
Davids also cautions against withdrawing from your “Savings Pot” unless it is for an absolute emergency. If possible, the best would be to leave it until you retire.
*Please note that this does not constitute as financial advice and any way.
**The amounts used are purely for illustration purposes
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