Important Information About the New Two-Pot System
The two-pot system is officially live after being signed into law on 1 June 2024 by President Cyril Ramaphosa. The new two-pot system came into effect on the 1st of September 2024, and many South Africans are rushing to reap the benefits – But caution should be used!
Previously, we discussed what the new two-pot system law means for individuals in South Africa. In this follow-up, we provide more information on things South Africans need to be aware of regarding the new system.
Quick Recap on the Two-Pot System
With the two-pot system, retirement savings are split into a savings pot and a retirement pot. With the savings pot, you will have the option of withdrawing funds for when you’re in a financial emergency. The retirement pot, on the other hand, is solely for post-retirement needs.
10% of your existing retirement funds savings go towards the savings pot as seeding capital. And you can make only one withdrawal per tax year.
Read: SARS Tax Update – Understanding The New Retirement Fund Taxation
The idea of the new two-pot system is to offer a balanced retirement savings approach which provides immediate financial relief as well as long-term security. The objective is to continue growing the economy and create more opportunities for South Africans while reducing the financial vulnerability of individuals and households.
Tax and the Two-Pot System
The new two-pot system introduced in September 2024 changes the way taxation and accessibility of retirement savings. If you’ve heard of the new system but haven’t quite got the update on the taxation of this new flexible system, there are some things you need to understand.
An important factor is what it would mean in terms of tax if you should withdraw from the Savings Pot. When you withdraw from the savings pot, the amount is subject to income tax based on your marginal tax rate. This withdrawal counts towards your annual income, and tax is added accordingly, depending on the bracket you fall into.
Read: Growing Your Savings in SA – The Harsh Truth
In short, the more you withdraw, the higher your tax rate could be. Keep in mind that you can only withdraw once a year, and there’s a minimum withdrawal requirement of R2,000. There are also no tax-free portions for these withdrawals.
How are Interest Rates Affected?
There are a couple of ways the new two-pot retirement system in South Africa will affect interest rates.
For one, there is the expectation of an increase in consumer spending as South Africans now have the opportunity to withdraw funds from the savings pot early on. While this can help stimulate economic growth, it can also lead to higher inflation.
Read: 7 Steps to Financial Wellness
Not to mention that it can add to inflation pressure. As higher consumption will lead to higher prices. In order to combat this, the South African Reserve Bank may increase rates to maintain price stability.
The belief is that while there may be a positive impact on the economic growth immediately, it has the potential to have a much less favourable impact in the long term if you take into account the reduction of savings and investments.
At the end of the day, the two-pot system can lead to higher interest rates in the years to come.
What Does an Early Withdrawal Mean?
Before you think about withdrawing from your retirement savings early, educating yourself on the consequences of doing so is best.
The first thing is the application of taxes. They add the amount to your annual income and then tax it, so you could potentially risk being pushed into a higher tax bracket, which could increase your overall tax liability.
There are penalties to consider. If you happen to do an early withdrawal, then you may be subject to a 10% penalty on top of the regular income tax. This can apply if you make a withdrawal before age 59.
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With this, you risk losing creditor protection. Should you withdraw funds early, then you risk losing the retirement account protection and making it accessible to creditors.
It goes without saying that with early withdrawals, you also risk missing out on potential investment growth, which can ultimately greatly impact your retirement savings as time passes. It is recommended to avoid early withdrawals unless absolutely necessary.
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