The South African Revenue Service (SARS) recently introduced significant changes to retirement savings with the new Two-Pot Retirement System, which became effective this week. Alongside these updates, SARS launched a Two-Pot Retirement System Calculator to help taxpayers estimate their potential withdrawal amounts.
Key Changes from 1 September 2024
From 1 September 2024, individuals who are members of pension funds, provident funds, pension preservation funds, provident preservation funds, and retirement annuity funds will have the option to access a portion of their retirement savings while still a member of the fund. This system divides retirement funds into three distinct components:
1. Vested Component
The Vested Component refers to the total value of a member’s retirement savings as of 31 August 2024, minus 10% of that value (capped at R30,000), which is allocated to the Savings Component as seed capital.
The remaining balance in the Vested Component can still be taken as a lump sum before retirement, and this is unaffected by the new system.
2. Savings Component
One-third of each member’s contributions to their retirement fund will be allocated to the Savings Component. This is in addition to the seed capital, which is 10% of the Vested Component, capped at R30,000.
Members can withdraw a minimum of R2,000 and up to the total value available in the Savings Component once per tax year. These withdrawals are termed “Savings Withdrawal Benefits.” At retirement, any remaining balance in this component can be taken as a lump sum in cash, if the member chooses to do so.
3. Retirement Component
Two-thirds of the member’s contributions will go into the Retirement Component. This portion is used to provide a pension or to purchase an annuity upon retirement, with certain exceptions.
The Retirement Component cannot be withdrawn as a lump sum if a member leaves the fund before retirement due to resignation, dismissal, or retrenchment. Instead, it must be transferred to another approved retirement fund.
Tax Implications of Withdrawals
SARS has clarified that withdrawals from the Vested Component will be taxed according to the individual’s marginal tax rate. The specific tax amount will depend on each taxpayer’s profile, but SARS has provided two examples for illustration:
- Example 1: A withdrawal of R25,000 by an individual earning R360,000 annually results in R17,275 after tax (R7,725 paid in tax).
- Example 2: A withdrawal of R25,000 by an individual earning R380,000 annually results in R16,750 after tax (R8,250 paid in tax).
The SARS calculator can offer a more personalized estimate based on a taxpayer’s unique financial information.
Important Considerations for Taxpayers
Before making any withdrawals, SARS advises taxpayers to consider several restrictions:
- Tax Registration: Individuals must be registered for tax to make a withdrawal.
- Compliance: All outstanding tax returns must be filed, and no taxes should be owed to SARS. Any debt owed to SARS will be deducted from the withdrawal amount.
- Low-Income Earners: For those earning below the tax threshold, their withdrawals will only be finalized during the annual Filing Season, where the income is taxed at 18%.
- Remaining Funds: If funds in the Savings Component are not withdrawn before retirement, they will be taxed as a lump sum upon retirement.
Changes in the Tax Directive System
To accommodate the changes in the Two-Pot Retirement System, SARS has updated the tax directive system and relevant application forms. This includes applications for the Savings Withdrawal Benefit and transfers of funds across the Vested, Savings, and Retirement Components to other retirement funds.
By understanding the structure of the new system, taxpayers can make informed decisions about their retirement savings and withdrawals. For precise calculations and options, taxpayers should use the new SARS calculator and consult with a tax professional if needed.
