On September 1, 2024, the two-pot retirement system was introduced, which brought significant changes to the management and taxation of retirement savings. This new system aims to provide more flexibility for retirement savers while ensuring long-term financial security. If you’re a taxpayer or an employer managing retirement funds, it’s important to understand the workings of the two-pot system and its tax implications.
What is the Two-Pot System?
The two-pot system divides retirement savings into two distinct portions:
- The Retirement Pot:
This pot holds 75% of your retirement savings. Funds in this pot are preserved for retirement and cannot be accessed until you reach retirement age. The primary goal is to ensure that individuals have sufficient funds to sustain themselves post-retirement. - The Savings Pot:
This pot comprises 25% of your retirement savings. It is designed to provide more flexibility by allowing you to access a portion of your savings before retirement. You can withdraw from this pot once a year, with a minimum withdrawal amount of R2,000.
How Will the Two-Pot System Be Taxed?
Understanding how each pot is taxed is crucial to making informed decisions:
Taxation of the Retirement Pot
The retirement pot will continue to follow the same taxation rules that apply to retirement savings in South Africa. When you retire, any lump sum withdrawal from this pot will be taxed according to the retirement fund lump sum benefit tables. The first R500,000 of your retirement benefit is tax-free, and amounts above this threshold are taxed at progressive rates, depending on the total lump sum amount withdrawn.
Taxation of the Savings Pot
Withdrawals from the savings pot will be taxed as income at your marginal tax rate. This means that the amount you withdraw will be added to your annual taxable income and taxed accordingly. It’s important to plan these withdrawals carefully, as taking a large amount in one tax year could push you into a higher tax bracket, increasing the tax payable.
Additional Tax Considerations
If an incorrect tax deduction occurs—whether under-deducted or over-deducted—the taxpayer will be responsible for any outstanding amount or entitled to a refund. This emphasises the importance of precise calculations and timely submissions to SARS (South African Revenue Service).
Planning Your Retirement?
Navigating the complexities of the new two-pot system and its tax implications requires expert guidance. We offer comprehensive tax advisory services to help you understand how the two-pot system impacts your retirement planning. We assist with compliance, optimise your tax liabilities, and provide tailored financial strategies to secure your future.
Get in touch with us today to ensure your retirement savings are managed effectively and that you remain compliant with the latest tax regulations.