Two pot or not. Leave your retirement savings alone!

If you have formal retirement fund savings you may be able to withdraw a portion of these from 1 September 2024, without resigning. But only if it is a real emergency! Withdrawing funds can drastically reduce how much you have at retirement, and the tax implications can be significant, so before cashing in, work with a financial adviser to make an informed decision! The new system is called the two-pot retirement system, and this is how it works.

What is the two-pot retirement system?

Up to 31 August 2024, all the money you have saved in formal retirement funds was invested on your behalf as one amount, and only available to you in two circumstances – when you retired or when you left your employment. Formal retirement funds include any pension funds, provident funds, preservation funds and retirement annuities.

Under the new two-pot retirement system, from 1 September 2024 any money you save for retirement in pension funds, retirement annuities, provident or preservation funds will go into two pots:

• One-third will be allocated to a savings pot, that you can access once every tax year
• Two-thirds will be allocated to a retirement pot that you can only access at retirement

It is important to understand that the two-pot retirement system is effective from 1 September 2024, so it only applies to money you save after this date! The money already in your retirement funds won’t be put into these two pots. However, there is an exception: On 1 September 2024, the lower of R30 000 or 10% of your already saved funds will go into a seeding pot, which is effectively part of a savings pot that you can access!

Three important points

1. You can only withdraw funds from your savings pot once every tax year. The tax year runs from the start of March to the end of February. Withdraw on 1 September 2024 and you can only withdraw again on 1 March 2025.
2. The minimum amount you can withdraw is R2 000. If there is less in your savings pot you won’t be allowed to withdraw it. There is no maximum amount you can withdraw, so if your savings pot has R20 000, you can withdraw all R20 000.
3. Charges apply. Retirement fund administrators will charge a withdrawal fee for the admin involved in processing the withdrawal.

The two-pot retirement system in action

Let’s say you are 40 years old and have R500 000 saved in your retirement fund on 31 August 2024. R30 000 goes into your seeding pot (the lower of R30 000 or 10% of your savings). You withdraw the R30 000, leaving R470 000 in your retirement fund.

If you contribute nothing further to your funds, and your investment grows at 8% per annum, at age 60 you have R2 190 650 for your retirement. But without taking the R30 000 you would have had R2 330 479!

Withdrawing just R30 000 leaves you with R139 829 less for retirement, and this is without taking tax into account! Talking about taxes....

This is what you need to know about taxes

Any withdrawal from your savings pot will be taxed at your marginal tax rate, and the tax deducted before your withdrawal is paid to you. And if you owe SARS money, including interest and penalties, these will also be deducted before the withdrawal is paid. Yes – you could end up with a lot less than you requested!

In addition, when you withdraw funds from your savings pot, the withdrawal amount you requested will be added to your taxable income for the year. If this amount pushes your total taxable income into a higher tax bracket, you will pay a higher tax rate on all your taxable income.

Top tip: Work out the tax implications before you sign the withdrawal form! Once you have signed it SARS have warned there is no going back, even if it means they take all the money and you end up owing more in tax than you did before requesting the withdrawal!

So when is it ok to withdraw funds?

Unless it is really essential and an emergency and you have no other alternative, leave your retirement savings alone!

If you are going to do it, do it as responsibly as you can

Make sure you work with an adviser and/or a tax consultant to understand all the implications including how it affects your retirement income and your taxable income. And, when you can, try to put back, or save in another fund, what you took out so that your income in retirement is not affected.

Proceed with caution

The two-pot retirement system can be a financial lifeline when you need it, but it is definitely not free money! Chat to a financial adviser or your retirement fund administrator to make sure you understand all the implications of taking money out of your retirement savings.