
A large portion of retirement fund members in South Africa who opted to withdraw funds from their savings through the two-pot retirement system were taken aback by the associated tax implications, according to a survey carried out by the personal finance platform JustMoney.
The survey participants expressed that the taxes felt “unfair” since it seemed as if the South African Revenue Service (Sars) was poised to “take everything.”
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Read: No tax registration, no two-pot withdrawal – Sars
While there has been a concerted effort to raise awareness through various media and direct communication from retirement funds, many members still lack a comprehensive understanding of the taxes they would face when withdrawing their funds.
Before the two-pot system was introduced on 1 September 2024, members were warned that accessing money from the savings pot would be “a costly approach” as these withdrawals would be subject to a notably higher marginal tax rate.
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Two-pot payouts top R21bn – Sars
Two-pot: Retirement withdrawals explained
Eye-watering taxes await those who withdraw funds under two-pot
There is a distinct difference between the marginal tax rate applied to the two-pot system and the tax rate that previously applied to early withdrawals from retirement funds.
The marginal tax rate is ‘progressive’
During debates in parliament and discussions with stakeholders prior to the implementation of the two-pot system, the elevated marginal tax rate faced criticism, particularly from the Congress of South African Trade Unions (Cosatu), which advocated for the retention of earlier tax tables.
Nonetheless, the National Treasury defended its decision to utilize the marginal tax rate, stating it was not meant as a “revenue-generating” measure for the government, but rather a “progressive” approach benefiting low-income and no-income fund members.
For instance, under the former system, withdrawals from retirement savings that surpassed R27,500 were taxed at a base rate of 18%, regardless of the fund member’s overall income.
Conversely, under the two-pot system, the amount withdrawn from a member’s savings component is included in their total income.
This arrangement results in individuals with minimal or no income incurring no taxes on their withdrawals, while those with higher incomes face greater tax rates because of their earnings.
The tax revenue produced by the two-pot system is projected to exceed initial estimates of R5 billion. In October, during the Medium-Term Budget Policy Statement, Sars confirmed that R7.2 billion had already been gathered in tax payments, marking a significant gain for the government.
In addition to this revenue, Sars is also recovering overdue taxes from two-pot claimants, sometimes leaving fund members with very little, or nothing at all, after submitting withdrawal requests.
Withdrawal process
The results from the survey released in early December showcased the struggles faced by consumers: 24% rated their financial circumstances as “poor,” 43% as “average,” and just 11% as “excellent.”
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The long-awaited two-pot retirement system was rolled out at the start of September.
Under this new structure, a retirement fund member’s contributions are categorized into three components: a savings pot consisting of one-third of retirement savings (which can be accessed once each tax year), a retirement component that includes two-thirds which must be preserved and converted into an annuity at retirement, and a vested pot encompassing contributions made prior to 31 August.
Mixed reactions
Among the 6,252 individuals involved in the JustMoney survey, 57% reported feeling “comfortable” accessing funds from their savings component, while 29% expressed concerns about the implications for their long-term savings.
Almost half of the respondents considered making withdrawals, yet 23% hesitated, worried about the potential effects on their future retirement.
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Withdrawing from that one pot will cost you dearly …
Absa anticipates R78bn in two-pot withdrawals in the first year
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Spending trends
Sars indicated on 19 November that South Africans had taken out just over R35 billion from their savings pots since early September.
This sum is likely to have surged due to the usual increase in expenditure during Black Friday in late November and throughout the holiday season.
Further withdrawals are expected as the start of the new school year nears, with parents needing to handle school fees and purchase uniforms and books.
The JustMoney survey allowed participants to provide multiple reasons for considering a withdrawal from their savings pot.
Here’s how they responded:
- 79% planned to pay off debt;
- 10% intended to “treat” themselves;
- 8% indicated they would spend it freely; and
- 15% answered “other,” detailing they would use the funds for essential needs like school fees, uniforms, and books, while others mentioned home renovations, starting businesses, or paying medical bills.
At the end of September, Discovery reported that two in ten of its members who withdrew funds would allocate them for educational expenses.
Nonetheless, the majority of the 17% of Discovery claimants who specified “other” as their reason for withdrawal indicated it was primarily for “home improvements and renovations.”
Read:
The two-pot lid is lifted – and providing for education is a priority
Why 22% of Discovery members have withdrawn money under two-pot
According to the JustMoney survey, 30% of respondents confirmed they had already begun the withdrawal process.
Of those who made withdrawals, 23% found the process to be seamless and efficient. Conversely, 7% reported frustration due to “unprofessional staff” and slow claims processing and payment.
Sarah Nicholson, operations manager at JustMoney, notes that many South Africans perceive the two-pot system as a viable solution to balance immediate financial needs with long-term retirement goals.
For some retirement members, the access to a portion of their savings offers increased financial flexibility and might even encourage greater savings, she suggests.
Taxes … and administrative fees
A critical issue expected to attract attention in the upcoming year is the administrative fees charged by fund administrators for withdrawals under the two-pot system.
The Financial Sector Conduct Authority (FSCA) has reported it is identifying firms that impose excessive transaction fees and will seek justifications for these charges.
Keystone Actuarial Services, a consultancy in Johannesburg, previously indicated that, collectively, the administrative fees for withdrawals could range from R640 million to R1.25 billion between 1 September 2024 and 28 February 2025, presenting a “material windfall” for retirement funds and/or their administrators.
The industry has defended its position, arguing that significant expenditures were necessary to prepare for the two-pot system, which included establishing call centers, training staff, and upgrading IT systems, alongside ongoing operational costs under the new structure.
For example, Alexforbes noted in the filing of its interim results that technology costs had surged by 13% year-on-year due to expenditures related to the two-pot system’s implementation, encompassing software, licensing fees, and increased use of outsourced services.
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