If you’re one of the more than two million retirement fund members whose taken advantage of the two-pot withdrawal benefit, now is the time to consider topping up your retirement funds to restore your position and maximise your annual tax benefits.
Since the two-pot system was introduced in September last year, more than R43 billion has been withdrawn, according to the South African Revenue Service. With the tax year ending on 28 February, those who have already made withdrawals in the 2024/25 tax year will be able to access funds again from the savings component in March this year, because the system resets at the beginning of each tax year. However, they will still be subject to the annual withdrawal limits and rules.
Retirement fund administrators will be closely monitoring the numbers in March to see how many individuals take advantage of this option, whether for the first time or as repeat users.
Carla Rossouw, head of tax at Allan Gray, advises: “If you made a withdrawal from the savings component of your retirement fund in the current tax year, you should consider replenishing this amount before the end of February.” She adds, “By doing so, you’ll put yourself in a better position when you reach retirement age.”
She emphasises that even though the new system allows you to access the savings component of your retirement fund once every tax year doesn’t mean you should.
“Withdrawing should not be viewed as an annual event that must happen.”
Tax benefits of retirement funds and TFIs
Before you decide how to top up your retirement fund, it’s worth weighing up the tax benefits of different investment products, specifically retirement annuities (RAs) and tax-free investments (TFIs).
“Every year, you can claim a tax deduction for all contributions to your retirement investments of up to 27.5% of your taxable income, capped at R350 000 per tax year,” states Rossouw. “However, if you don’t make use of this benefit, you forfeit it.”
As an example of how maximising your tax benefit every year can help you in retirement, she shares the scenario of an investor who contributes 15% of their monthly salary to an RA from the age of 30 to 60. At the age of retirement, that investor would have saved up R15.5 million. However, if the same investor contributed an extra R10 000 lump sum annually, their ultimate retirement savings would be 20% higher at R18.6m.
Both retirement funds and TFIs offer tax benefits, such as no tax on interest, dividends or capital gains, but they each have restrictions.
“TFIs, for instance, don’t allow you to make tax deductions, and you can’t invest as much money in them as you would in an RA,” explains Rossouw. “But the advantage with TFIs is that, unlike RAs, there are no asset class restrictions, and you can access your investment at any point in time.”
However, there are restrictions in terms of how much you can contribute to TFIs. “SARS allows taxpayers to save a maximum of R36 000 per tax year and R500 000 in your lifetime tax-free, and there are tax implications for overcontributing,” she says. “You can incur a tax penalty of 40% on any amount over the contribution limits.”
She says a TFI can help you to save for a specific goal or to supplement your retirement investment.
Take advantage of tax benefits
Regardless of whether you’re invested in an RA or a TFI (or both), you can benefit significantly by topping up your investment before the end of the tax year.
“It’s always a good idea to maximise the tax benefits on offer, but even more so in a two-pot world if you have withdrawn from your retirement fund recently and want to restore your position,” comments Rossouw.
“Remember that each time you dip into your RA’s savings component, you are taxed at the marginal tax rate on the amount withdrawn,” which can be as high as 45%. “Furthermore, withdrawing before retirement reduces the amount available as cash at retirement,” she adds. “Even if you do replace the amount withdrawn, you’ll lose out on any investment growth in the interim.”
If you want to take advantage of tax benefits before the end of February, you have a few options.
“You can make an additional contribution, either in the form of a lump sum to your RA or, if you’re invested in your employer’s retirement fund, an additional voluntary contribution,” says Rossouw. “You can also start an RA in your own name or create a TFI to save for a specific goal or to supplement your retirement investment.”
Disclaimer: The information in this article does not constitute investment or financial planning advice that is appropriate for every individual’s needs and circumstances.
