National Treasury has resolved the quandary over how lump-sum withdrawals from the savings component (or “pot”) of their retirement fund will be taxed at retirement.
The quandary arose because of a conflict between the 2023 Draft Revenue Laws Amendment Bill and the accompanying explanatory memorandum, which were published in early June. The draft amendments will create the two-pot retirement system. The scheduled implementation date is 1 March 2024.
In terms of the two-pot system, one-third of a member’s retirement contributions will be allocated to the savings component, and the balance to the retirement component.
Members will be allowed to make one full withdraw from their savings component per tax year, provided they withdraw at least R2 000.
Withdrawals from the savings component will be included in a member’s taxable income and taxed at his or her marginal tax rate (the income tax brackets will apply).
According to the example in Treasury’s explanatory memorandum, a lump-sum withdrawal from the savings component when a member reaches normal retirement age will also be taxed at a member’s marginal rate. On the other hand, the draft legislation stated the withdrawal will be taxed according to the retirement lump-sum withdrawal table.
Taxing lump-sum withdrawals at the marginal rates (between 18% and 45%) would severely disadvantage members at retirement. It could also act as a disincentive to preserving funds in the savings component until retirement.
The retirement lump-sum withdrawal table exempts from tax the first R550 000 taken as cash, and the top rate of tax is 36%.
The good news for retirees is that Treasury says the retirement lump-sum withdrawal table will apply to cash withdrawals at retirement.
Treasury has not issued a statement on the issue. It told Moonstone that a media report that the retirement lump-sum withdrawal table will apply to withdrawals was correct.
Fund members are not obliged to make a full lump-sum withdrawal from their savings component at retirement. They can transfer some or all of it to their retirement component, enabling them to buy a bigger annuity.
The retirement lump-sum withdrawal table will also apply to cash withdrawals at retirement from the vested component, which will house a fund member’s accumulated retirement interest as valued immediately before 1 March 2024.
Good day, i am turning 56 years in November 2023 and would like to know if i retire before 2 pot vs post 2 pot what tax implications there is. I was on the provident fund until Feb 2021.
Please inform, thank you kindly
Good day. Whether you retire before or after the implementation of the two-pot system will not affect how your retirement benefit is taxed. There will be implications for your benefit it you remain a contributing member after two pots comes in you make withdrawals from your savings pot. Savings pot withdrawals will be taxed at your marginal rate, and the money you withdraw from the pot will reduce how much you have available at retirement.