You will also need to take into consideration the costs and taxes deducted from your withdrawal. Picture: Towfiqu barbhuiya via Unsplash.
Martin Hesse
If you plan to withdraw retirement savings from your “savings pot” after the two-pot retirement system comes into effect on September 1, you need to take into consideration the costs and taxes that will be deducted from your withdrawal. The deductions may be more than you realise, especially if you are in a defined-benefit fund.
The legislation allows for your savings pot – the one-third portion of your savings to which you will have access once a year – to be seeded with capital from your existing savings, the so-called “vested pot”. (The different portions of your retirement savings are officially called “components” but are widely known, and referred to here, as “pots”.) This will be 10% of your existing savings to a maximum of R30 000.
You may be tempted to withdraw money straight away, and there may be valid reasons for doing so. The recently published 2024 Sanlam Benchmark Survey of retirement funds shows an increase in people intending “definitely” to access savings in this manner – from 13% of respondents last year to 22% this year. This has risen in line with increases in indicators measuring financial stress, suggesting that many people may be considering withdrawing their accessible savings simply to alleviate mounting financial pressures.
Apart from the “opportunity cost” of not leaving your savings to grow until you retire, there will be various immediate costs, resulting in a lower cash amount than you may expect – in certain instances far lower.
Actuarial fees
In an article in the Sanlam Benchmark Survey Insights Report, “Managing defined-benefit members’ expectations when accessing their savings pot”, actuary Ryan Campbell-Harris from Simeka Consultants and Actuaries explains that if you belong to a defined-benefit fund, on top of tax and a transaction fee, you may have to pay a relatively high actuary’s fee for the necessary calculations.
There are not many defined-benefit funds still around in South Africa. This type of fund guarantees you a pension benefit when you retire, based on your salary and years of service. The amount on which your pension is based is calculated using an actuarial formula and is known as the actuarial reserve value (ARV).
The two-pot system was essentially designed with defined-contribution schemes in mind; the amounts in the different pots in a defined-benefit scheme require further calculations. Campbell-Harris explains: “To calculate the size of a defined-benefit member’s savings pot, the ARV will be calculated as usual, based on the fund’s rules, using the member’s total pensionable service. This ARV will then be split in proportion to the member’s pensionable service date of each pot at the time of the withdrawal.
“A member will then be able to decide how much of the savings pot he or she wants to withdraw, and either the actuary of the fund or the administrator will need to calculate by how much the service date of the savings pot and the total service will need to be adjusted after the withdrawal is processed, so that the adjusted ARV value can be calculated in the future.”
Assuming a member with a marginal tax rate of 31% withdraws R10 000. In a defined-contribution fund the transaction fee may be R200, after which tax of R2 852 will be deducted. The net cash amount will be R6 762.
In a defined-benefit fund, Campbell-Harris says the same tax and transaction cost would apply, but there would be an additional cost to calculate the member’s ARV and revised pensionable service date. “These calculations would take up approximately one hour of an actuary’s time, which could result in costs of up to R5 000 per withdrawal request,” he says. Hence, a defined-benefit member withdrawing R10 000 would be paid a net benefit of only R3 312. (Tax is deducted after costs, so the tax will be lower.)
Longer process
In addition to the monetary costs, Campbell-Harris says, you also need to consider the time it takes for a withdrawal benefit to be processed. “Barring the initial inception period, in the defined-contribution environment this process is expected to be not much longer than the time the administrator currently takes to process a normal fund withdrawal. However, the time it takes to process a defined-benefit withdrawal would be significantly longer given the involvement of an actuary to determine the value of the withdrawal benefit,” he says.
Campbell-Harris says that if the current methodology of determining a defined-benefit member’s withdrawal is maintained, it will be difficult to explain to the member why the deduction is so large and why the transaction takes so long to process.
To make things more equitable between defined-contribution and defined-benefit funds, Campbell-Harris suggests that defined-benefit funds pay an actuary a triennial once-off fee to produce tables the administrator could use to simplify and speed up the withdrawal process and do away with the actuarial cost per withdrawal being incurred by the member.
GEPF position
A notable defined-benefit fund in South Africa is the Government Employees Pension Fund (GEPF), which has about 1.3 million active members. The GEPF says the actuarial costs of recalculating a member’s benefits if he or she withdraws money from the savings pot will not be incurred by the member.
PERSONAL FINANCE