Two-pot retirement system: Tax implications when making a withdrawal from the savings pot
By William Donachie, Legal and Technical Specialist
On 1 September 2024, the retirement system in South Africa will change considerably. The new regime is known as the two-pot retirement system. Going forward, members of retirement funds will be able to access a portion of their retirement savings while still being employed, without the need to change jobs or to resign from their employment. Another feature of the new system is forced preservation of retirement benefits, even upon changing jobs, thus ensuring that members will have money available for retirement. As a result, monthly contributions will be split, with one-third of the contributions made by or on behalf of the member being allocated to a savings pot and two-thirds to a retirement pot.
The two-pot retirement system will retain the current principle where contributions to a retirement fund are allowed as a tax deduction while also exempting the investment growth in the retirement fund from being taxed. Under this arrangement, tax is imposed on any withdrawals from the fund and on the monthly pension received in retirement. This is to ensure that the pre-tax earnings from which the contributions were made, together with the investment earnings of the retirement fund, are ultimately taxed. The initial tax benefit or incentive is thus a tax deferral as opposed to a permanent tax advantage.
It is important to understand the tax implications of a savings withdrawal benefit.
Savings withdrawal benefits consisting of the seed capital or any subsequent amounts from the savings pot
From 1 September 2024, retirement funds will make provision for the creation of seed capital, which will represent the opening balance in the savings pot of each existing member. This amount will be available to take as a savings withdrawal benefit after the implementation date of the two-pot retirement system. The opening balance is calculated as the lesser of 10% of the total benefit in the retirement fund and R30 000. A member with a fund benefit of more than R300 000 could therefore potentially have R30 000 available to withdraw from the savings pot, which will be taxable if taken as a savings withdrawal benefit. Any future savings withdrawal benefits taken from the savings pot will also be taxable.
These savings withdrawal benefits will be added to the member’s taxable income and will be taxed at their marginal rate, i.e. the pay-as-you-earn (PAYE) tax table. The PAYE tax table consists of different tax brackets with the lowest bracket at 18% and the highest bracket at 45%. For example, if a member falls within the 36% tax bracket, a savings withdrawal benefit of R30 000 could result in a tax liability of R10 800, which leaves the member with an amount of R19 200 after tax. It should be noted that the retirement fund must apply for a tax directive from SARS for the amount to be deducted for tax purposes.
Deduction of arrear taxes
Another often overlooked tax implication arises when a member has any outstanding tax liabilities owing to SARS. When a taxpayer receives a tax assessment from SARS and the assessment reflects an amount due, the taxpayer must pay the tax debt on or before the date specified on the tax assessment. If the amount is not paid by the due date as specified on the tax assessment, interest is payable and levied at the prescribed rate on the outstanding amount. In terms of section 169 of the Tax Administration Act (TAA), any amount of tax, penalties or interest payable shall, when it becomes due or is payable, be deemed to be a debt due to the state. SARS has a number of powers at its disposal under the TAA to assist in the collection of assessed tax from a taxpayer and one such power is found under section 179 of the TAA. In terms of this section, SARS has the power to appoint any third party as an agent for the collection of outstanding tax debts from a taxpayer.
In terms of section 179(1), a senior SARS official is authorised to issue a notice to a person who holds or owes any money for or to a taxpayer, directing that person to pay the money to SARS to settle the taxpayer’s outstanding tax debt. Under this section, SARS often instructs a retirement fund to pay over to SARS amounts due to it before the retirement fund pays over the lump sum to the taxpayer. Therefore, any outstanding taxes owed to SARS must be deducted from the savings withdrawal benefit before it is paid to the member.
In practice, an IT88L (a document issued by SARS) will be attached to the tax directive issued to the retirement fund and it will contain all outstanding tax amounts owed by the member to SARS. The outstanding taxes will be deducted from the savings withdrawal benefit by the retirement fund and paid over by the fund to SARS as an additional amount after the initial tax amount on the savings withdrawal benefit has been deducted. The amount(s) indicated in the IT88L must be paid to SARS and the retirement fund has no discretion in this regard. The IT88L cannot be cancelled either. The deduction of the arrear taxes will only be avoided if SARS Debt Collection issues a letter to the administrator of the fund advising that an arrangement for any outstanding taxes or a settlement agreement is in place, or that the debt has been settled and proof provided.
Members who are contemplating making a withdrawal from their savings pot should carefully consider the tax implications of such a withdrawal, before submitting a withdrawal instruction to the fund, as the instruction cannot be reversed and may have serious implications for members if they have outstanding taxes owed to SARS.
Read the article from Pensions World South Africa Q3 of 2024