A considerable number of retirement fund members in South Africa who opted to withdraw funds from their savings under the two-pot retirement system were taken aback by the tax implications, according to a survey by the personal finance platform JustMoney.
The participants reported feeling that the taxes levied were “unfair,” as the South African Revenue Service (Sars) seemed to “take everything.”
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Read: No tax registration, no two-pot withdrawal – Sars
Despite extensive awareness efforts via media and communications from retirement funds, many members appeared to have a limited understanding of the taxes associated with withdrawing their funds.
Before the implementation of the two-pot system on 1 September 2024, members were warned that accessing the savings pot would be “a costly way” to retrieve money, as such withdrawals would be taxed at a significantly higher marginal tax rate.
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Eye-watering taxes await those who withdraw funds under two-pot
There is a stark difference between the marginal tax rate applied to the two-pot system and the previous tax rate concerning early withdrawals of retirement funds.
The marginal tax rate is ‘progressive’
During discussions in parliament and among stakeholders before the establishment 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 the previous tax tables.
Nonetheless, the National Treasury defended its decision to adopt the marginal tax rate, stating it was not aimed at generating revenue for the government but was instead “progressive,” benefiting those with low or no income in the fund.
For instance, under the old system, withdrawals from retirement savings above R27,500 were taxed at a minimum rate of 18%, regardless of the member’s income.
Conversely, under the two-pot system, the amount withdrawn from a member’s savings component is integrated into their total income.
This arrangement implies that individuals with minimal or no income will not face taxes on their withdrawals, whereas those with higher incomes will encounter elevated tax rates based on their earnings.
The tax revenue anticipated from the two-pot system is projected to exceed original estimates of R5 billion. In October, during the Medium-Term Budget Policy Statement, Sars confirmed collecting R7.2 billion in tax payments already, marking a substantial benefit for the government.
In addition, Sars is recovering unpaid taxes from two-pot claimants, resulting in cases where fund members receive very little or nothing at all after making withdrawal requests.
Withdrawal process
The survey findings released in early December indicated a distressed consumer landscape: 24% rated their financial situation as “poor,” 43% as “average,” and only 11% as “excellent.”
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The long-awaited two-pot retirement system was launched in early September.
Under the new structure, a retirement fund member’s contributions are split into three elements: a savings pot consisting of one-third of retirement savings (accessible once per tax year), a retirement component comprising two-thirds that must be preserved and converted into an annuity upon retirement, and a vested pot containing contributions made before 31 August.
Mixed reactions
Among the 6,252 respondents in the JustMoney survey, 57% felt “comfortable” withdrawing funds from their savings component, while 29% expressed worries about the implications for their long-term savings.
Nearly half of the participants considered making withdrawals, but 23% hesitated due to concerns over the impact on their future retirement.
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Spending trends
Sars reported on 19 November that South Africans had withdrawn just over R35 billion from their savings pots since early September.
This total is likely to have grown due to the typical spending increase during Black Friday at the end of November and throughout the holiday season.
Additional withdrawals are expected as the new school year approaches, with parents needing to pay for school fees and acquire uniforms and books.
The JustMoney survey allowed multiple responses from participants considering a withdrawal from their savings pot.
Here’s how they responded:
- 79% intended to pay off debt;
- 10% planned to “treat” themselves;
- 8% said they would spend it freely; and
- 15% indicated “other,” specifying they would use the funds for basic necessities like school fees, uniforms, and books, while others mentioned home renovations, starting a business, or covering medical expenses.
Discovery reported at the end of September, one month into the two-pot system, that two in ten of its members who withdrew funds would designate these for educational purposes.
However, most of the 17% of Discovery claimants who cited “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 funds under two-pot
According to the JustMoney survey, 30% of participants reported having already made a withdrawal.
Among those who withdrew funds, 23% found the process to be swift and straightforward. In contrast, 7% reported frustration due to “unprofessional staff” and delays in the processing and payment of claims.
Sarah Nicholson, operations manager at JustMoney, notes that many South Africans view the two-pot system as a possible way to reconcile urgent financial needs with their long-term retirement goals.
For some retirement members, the ability to access a portion of their savings offers increased financial flexibility and may even encourage them to save more, she adds.
Taxes … and administrative fees
A significant issue anticipated to attract attention in the coming year involves the administrative fees imposed by fund administrators for withdrawals under the two-pot system.
The Financial Sector Conduct Authority (FSCA) has indicated it is identifying companies that charge high transaction fees and will require justifications for these costs.
Keystone Actuarial Services, a consultancy in Johannesburg, previously noted that the cumulative administrative fees for withdrawals may range from R640 million to R1.25 billion between 1 September 2024 and 28 February 2025, representing a “considerable windfall” for retirement funds and/or administrators.
The industry has defended its stance, explaining that significant expenses were incurred for the preparation of the two-pot system, including establishing call centers, staff training, and upgrading IT systems, alongside ongoing operational costs under the new regime.
For instance, Alexforbes indicated at the filing of its interim results that technology expenses had risen by 13% year over year due to costs associated with the implementation of the two-pot system, encompassing software, licensing fees, and an uptick in outsourced services.
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