Be wary of withdrawals

TWO-POT RETIREMENT SYSTEM: LONG-TERM IMPACT CAN BE MASSIVE

One can also be pushed into higher tax bracket for a year.

While many consumers cannot wait for the two pot retirement system to be implemented on 1 September, to give them access to a third of their retirement savings, they have to keep in mind that their withdrawals will affect how much they save in the end, and that they will pay tax on the withdrawals.

The new rules will require all future contributions to retirement funds be split into two portions: two-thirds will be allocated to a retirement component, which must be preserved until you retire, while one third will be allocated to a savings component.

Pension fund members will be able to withdraw from the savings component once per tax year before retirement. The withdrawal amount will be limited to the value in the savings component at the date of withdrawal.

The idea behind this new system is to promote the preservation of retirement fund savings until retirement, while also providing retirement fund members with some access to their savings in times of need before their retirement age, said Jaya Leibowitz, senior legal adviser in the Retail Legal team at Allan Gray.

But she added that one should rather set up an emergency fund for this purpose. If you do use your savings withdrawal benefit, the first thing to remember is that tax will be paid on it.

Leibowitz said a savings withdrawal benefit will be included in your gross income for the tax year. “The amount withdrawn will be taxed at your marginal tax rate. If you are unemployed and have no income in the year of the withdrawal, you can withdraw up to R95 750 from your savings component tax-free (this is the tax threshold for South African tax residents under the age of 65).”

The maximum amount available for a savings withdrawal benefit will be the amount that has accumulated in the savings component (contributions plus growth, less any costs) at the date of the withdrawal.

If you are earning, because it is included in your gross income, the withdrawal amount could push you into a higher tax bracket.

This aims to discourage individuals from accessing a savings withdrawal benefit when they do not really need it.

Leibowitz used the example of Sally: she is 35 and earning a taxable income of R370 000. Her tax liability will amount to R59 997 (R42 678 + 26% of the amount above R237 100, with a primary rebate of R17 235).

If Sally decides to access a savings withdrawal benefit of R25 000, she will be pushed into a higher tax bracket, and will be liable for tax of R67 722 (R77 362 + 31% of the amount above R370 500, with a primary rebate of R17 235).

The second thing to remember is the long-term impact of accessing your savings withdrawal benefit. Leibowitz said it may have a far bigger impact than you realise.

If, for example, you plan to retire at 65, and take a savings withdrawal benefit of R50 000 at the age of 35 for a holiday, you could lose out on up to R870 000 that would have provided you with a retirement income. (Total investment growth assumed is 10% per year for 30 years with inflation at 6% plus 4% and the investment is assumed to grow at a steady rate; no volatility is considered.)

Before making a withdrawal, she said, ask these questions:

▶ Is the withdrawal amount for something important? If yes, do you need the full amount or can you reduce it?

▶ What is your marginal tax rate likely to be in the year of the withdrawal, and how can the withdrawal impact your overall tax liability?

▶ How much tax are you likely to pay on the withdrawal itself?

▶ How is the withdrawal likely to impact your long-term retirement savings?

Rather set up an emergency fund if possible