Retirement fund members have so far applied to withdraw R4.1 billion from their savings components, according to statistics released yesterday by the South African Revenue Service (SARS).
Of the 161 607 applications for a tax directive received from retirement fund administrators from 1 to 10 September, SARS said that 159 853, or 98.9%, related to savings withdrawal benefits – made possible by the introduction of the two-pot retirement system.
SARS Commissioner Edward Kieswetter said applications for tax directives are submitted to SARS by fund administrators via eFiling. The directive indicates how much tax should be withheld on behalf of SARS before the benefit is paid out.
“Taxpayers who owe SARS money must realise that this tax debt will be added to the tax on withdrawal from the savings benefit. But if there are payment arrangements in place to settle the debt with SARS, this debt will be deducted as per agreement between SARS and the taxpayer. A tax debt that has been deferred will also not be deducted,” Kieswetter said.
He indicated that the turn-around time for SARS to complete directive applications, without any human intervention, is no more than 48 hours.
Alexforbes, South Africa’s largest retirement fund administrator, has seen an unprecedented surge in claims since the implementation of the two-pot retirement system.
In just the first week, Alexforbes received and processed 78 000 claims, equivalent to what it typically handled over six months under the previous legislation. These claims are at various stages, including awaiting SARS directives and undergoing bank validations, with numerous payments already in progress.
The total value of claims being processed amounts to R1.5bn, with an estimated R270 million earmarked for taxes.
Alexforbes anticipates this high level of activity will persist in the coming weeks.
According to BusinessLive, Momentum, which owns Metropolitan, reported that applications had approached 31 000 by the close of business on Monday.
Although members aged 40 to 49 account for the largest share of applications (just over 40% as of 9 September), applications from those aged 30 to 39 are rising steadily. This shift reflects a growing trend of younger individuals applying for access to their funds.
Metropolitan said SARS directives show an average tax rate of 36% on withdrawals, indicating that applicants tend to fall within the R40 000 middle-income category, contrary to earlier predictions that most applicants would be lower-income earners.
However, Momentum has observed that many individuals choose not to withdraw their two-pot funds once they understand the tax implications.
The Government Pensions Administration Agency (GPAA), which administers pension funds on behalf of the Government Employee Pension Fund, has received 63 000 withdrawal applications since 1 September, according to spokesperson Mack Lewele.
The GPAA told TimesLive that the amounts vary based on individual qualifications, but most people have claimed the maximum, averaging R30 000.
Alexforbes expects that, at the current pace, the country could see a positive GDP impact of between 0.3% and 0.7% this year, as highlighted in recent research from the South African Reserve Bank.
The group also notes that the surge in activity underscores the critical role retirement fund investments play in individuals’ lives, with the new system driving higher levels of engagement.
“However, the recent activity also highlights that we have a long way to go to educate individuals to make sound financial decisions,” Alexforbes stated.
“Whilst there is no doubt many members who are financially stretched and need to access their savings pot for relief, there are many who are doing so simply for short-term consumption or misunderstanding that their option to withdraw is available on an ongoing basis and there is no need for rushed decisions now.”
How it works
Contributions to a retirement fund are not taxed when they are made to the fund. Tax is payable when the person makes a lump-sum withdrawal before or at retirement. The income from an annuity bought with a retirement fund benefit is also subject to tax.
Lump-sum withdrawals made before retirement from the savings component are taxed at a member’s marginal tax rate.
The savings component is one of the two new components to which retirement fund members’ contributions are allocated as of 1 September.
One-third of a member’s contributions will be allocated to the savings component, and two-thirds to the retirement component, which can be accessed only once a member reaches retirement age. The entire benefit in the retirement component must be used to buy an annuity.
A member can withdraw whatever is in the savings component once during the tax year, provided at least R2 000 is available to withdraw.
The savings component will be seeded with the lower of 10% or R30 000 of the value of a member’s accumulated retirement benefit as of 31 August. The seeding of the saving component is once-off. The member’s accumulated retirement benefit will be allocated to the vested component.
Members who want to make a withdrawal from their savings component must submit an application to their retirement fund. The fund’s administrator will verify that the member’s details on the application match those it has on record. If the information does not match, the application will be rejected.
Once the member has been successfully verified, and if he or she has at least R2 000 available in the savings component for withdrawal, the administrator will apply for a tax directive from SARS.
SARS will automatically reject applications for a tax directive if the member is not registered as a taxpayer
In addition to being registered taxpayers, members’ tax affairs must be in order, which means they must not have any outstanding tax returns, and they must not owe SARS any money.
If a member has a tax debt, SARS will instruct the administrator to deduct the tax debt from the two-pot withdrawal and pay it over to SARS to set it off against the tax debt.
However, if a member has entered a payment arrangement with SARS, the withdrawal will not be affected; the debt will still be settled in terms of the arrangement. This is also the case if the member has entered a suspension-of-payment arrangement while negotiating with SARS to defer the payment of a debt.
It is only savings benefit withdrawals that are taxed at a member’s marginal tax rate.
Members of pension or provident funds can make pre-retirement withdrawals from their vested component if they resign from their jobs. These withdrawals are taxed according to the withdrawal benefit table, where only the first R27 500 is tax-free.
Lump sums withdrawn from the savings component at retirement will be taxed using the retirement lump-sum benefits or severance benefits table. In this case, not only are the tax rates lower but up to R550 000 is tax-free.
Know your yearly tax threshold
Based on the taxing provision, you are taxed on all your income, whether that is income on savings from your bank account, or if you were renting out a property. The two-pot withdrawal is also a form of income and as such is liable to tax.
In a recent interview with eNCA’s Heidi Giokos, Kieswetter explained an important point about the money in the savings pot: when it was first deducted from your salary, it wasn’t taxed.
He said, “If you earned R100 and R15 was paid into a retirement fund, that R15 was not taxed, and your tax was calculated on the R85.”
The idea was that when you eventually take this money out in the future, it would then be taxed as income. However, with the new two-pot system, fund members can now access some of that money earlier. But by doing so, they trigger the tax event earlier too. Kieswetter explained that, normally, when you retire and withdraw the money, your total income might be lower, meaning you’d pay less tax. But if you take the money out now, it gets added to your income for this year, which could result in a higher tax bill.
“So, the initial income will be deducted at marginal rate, but at the end of the year, once all the income is imputed, an assessment may raise an additional tax. Or if, for some reason, their taxable income over the rest of the year was lower, they would be due for a refund.”
In other words, if the withdrawal amount received after marginal tax has been subtracted, leads to you exceeding your yearly tax threshold, you could end up having to pay tax on the difference after the “correct tax” has been calculated come tax filing season. Visa versa, you could receive a refund.
“So, it could go either way. But for now, I think assume that the money that you will draw now, unless your total income is still below the tax threshold, it will be subject to tax.” Kieswetter said.
Think twice
Unlike some other countries, South Africa has chosen not to restrict how the withdrawn funds from the savings component can be spent. In contrast, countries such as Singapore allow borrowing against retirement funds but only for specific purposes, such as buying property or investing in the stock market. South Africa has not imposed such limitations.
Kieswetter underscored the importance of careful consideration when deciding to withdraw: “One would hope that financial advisers give good advice and that those who want to withdraw think carefully, because it’s not a free call. You’re reducing your future income and creating a tax event earlier than you normally would.”
He acknowledged the temptation for instant gratification but urged people to think about the long-term impact of their decisions.
“I have empathy for families who are really struggling and who want to use this money for something that has enduring value or attends to an emergency or urgent need, like education.
“We have not placed any restriction, and therefore we need to raise the level of education and awareness through various agencies. SARS does that, but financial planning advice should also bear this in mind when advising their members.”
