Knowing the difference between facts and misconceptions about the two-pot retirement system is important to make informed decisions. Picture: Freepik
Since the two-pot retirement system was implemented in South Africa on September 1, 2024 there have been numerous withdrawal applications, however, many South Africans are still in the dark about the new system.
Roxanne Tobias, Actuary & head of Marketing and Communications, Sanlam Risk & Savings said that is crucial to address questions and clarify misconceptions about the two-pot retirement system.
Here are five common misconceptions identified in the first two weeks since the two-pot retirement system came into effect.
According to Tobias, some South Africans believed they would receive an immediate payout after applying for a withdrawal while others expected automatic payments without applying for a withdrawal.
Tobias said that SA retirement and tax legislation have strict processes that must be followed to ensure compliance when an individual wants to withdraw funds from retirement savings and it takes more time to process.
The process includes:
Tobias said that there is the belief everyone with a retirement fund has access to or will receive R30,000, regardless of the funds that are available in their savings pot.
When the two-pot system took effect the savings and retirement pots were added to the retirement vehicle of every retirement fund member, and both pots had balance of zero.
The savings pot of the two-pot retirement system received a once-off boost from the vested pot of existing retirement savings. This boost is referred to as seeding.
“This boost amount was calculated as 10% of the balance in the vested pot but subject to a maximum of R30,000,” Tobias said.
“The exact amount available to each member to withdraw, is calculated based on how much each individual fund member has available in their savings pot. There is therefore no guarantee of access to an amount of R30,000.“
According to Tobias, South Africans are under the assumption that withdraw R30,000 annually from their savings pot, but that is not the case.
In a tax year (1 March – 28 February), South Africans can make one withdrawal from their savings pot. Every time people make a withdrawal, the balance in your savings pot is subtracted by the amount they withdrew.
Tobias said that the value of a savings pot at any point in time will equal the initial once-off seeding amount plus one third of all contributions from September 1, 2024 onwards. The investment growth will then grow unless any other withdrawals are made.
“If your savings pot had a balance of R30,000 on 1 September 2024, and you withdrew this full amount in the current tax year, you will only be able to withdraw whatever is available in your savings pot in the following tax year which may be significantly less than R30 000,” Tobias said.
If a person contributes R3,000 per month to their retirement fund, only R1,000 will go to their savings pot per month.
This means that over a 12-month period the balance of the savings pot will increase with R12,000 because of the contributions ignoring growth on the existing balance in the savings pot.
If a member’s savings pot balance was zero at the start of this 12-month period, then there will only be R12,000 available to this member to withdraw the following year.
Sanlam said that they have observed that has been a fear amongst South Africans that they will forfeit the money if they don’t withdraw from their savings pot.
However, any funds that have not been withdrawn will stay in the savings pot, and the investment will grow.
“The accessible portion is yours to manage, but there is no disadvantage to leaving it untouched. Keeping your savings invested, means that you benefit from compound interest, boosting your retirement fund over time,” Tobias said.
People think that they can withdraw money from their retirement savings and then catch up later but this can be difficult because the longer they wait to save, and the more they withdraw, they can lose out on compound interest.
“To replace a savings withdrawal amount and its potential growth, you would need to invest significantly more in your retirement fund than the original amount which you withdrew. This is because the new contributions have less time to compound and grow before you retire,” Tobias said.
South Africans need to be aware of the long-term implications before withdrawing their retirement funds. They should get advice on financial decisions as significant as this.
Tobias said that a important step of the withdrawal process is the tax directive application, which dictates how Sars will tax your savings pot withdrawal amount.
“The withdrawal amount will be taxed at your current tax rate, which will depend on your total taxable income in the tax year, including the withdrawal from the savings pot,”Tobias said.
“The income tax as well as any outstanding tax debt, will be deducted from the withdrawal amount before it is paid to you.”
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