Pension Plain: the hidden costs of withdrawing from your Savings Pot

During a recent speech, Edward Kieswetter, the Commissioner of the South African Revenue Service (Sars), stated that the total amount of tax collected from retirement fund members who made Savings Pot withdrawals amounted to around R15 billion.  Put differently, Sars on average received about R25 of each R100 withdrawn, and members only received R75 or less of their own money. 

Our collective retirement savings pool has been robbed of R57 billion that will never grow tax-free to provide a future tax-free lump sum benefit or a higher monthly pension amount after retirement.  In the whole Two Pots debate, the negative effect that income tax has on early withdrawals from our Savings Pots does not seem to be high on the agenda. 

As a result, fund members make ill-informed decisions by not taking the tax effect of their withdrawals into account and then complaining about how they were robbed when they received much less than they anticipated. Firstly, any withdrawals from your Savings Pot will immediately reverse part of the tax deduction that you received when you contributed to your fund. If you contributed R3,000 to your fund, of which R1,000 went into your Savings Pot, you received a tax deduction on the full R3,000 contribution to the fund. 

If you now withdraw R1,000 from your fund, the R1,000 will be taxable at your marginal income tax rate.  If your withdrawal is in a different tax year than the year you contributed, you will not be able to replace that contribution and obtain the tax deduction in the same contribution year. 

If you therefore contribute 27.5% of your income, for example, R90 000, to a fund and get the full tax deduction and you then withdraw the R30,000 that you have in the Savings Pot, you are not allowed to then contribute an additional tax-deductible contribution of R30 000 in addition to the 27.5% to your fund as the Savings Pot withdrawals are not deducted from your contributions made for tax purposes. Secondly, you will reduce the tax-free amount that you can take as a lump sum payment from the Savings Pot of your fund at retirement.

Currently, you are allowed to take R550,000 as a tax-free lump sum amount at retirement.  If you started to contribute to a fund after September 1, 2024, and you keep on making withdrawals from your Savings Pot, chances are that you will end up having significantly less than R550,000 in your Savings Pot at retirement. Although the tax issue is concerning enough, the fact that you might end up with significantly less money to retire should be your major concern.

If you started your fund membership after September 1, 2024 and you contribute R10 000 per month (R3 333 going into your Savings Pot and R6 667 going into your Retirement Pot) to your retirement fund for a period of 30 years and you attain an investment return of 10% per annum, you will have about R7 million in your Savings Pot and about R14 million in our Retirement Pot. 

If you, however, withdraw all the money in your Savings Pot on an annual basis, you will end up having only R44 000 in your Savings Pot that you can take as a tax-free lump sum at retirement.  This is significantly less than the R550 000 that you can take as a tax-free lump sum amount at retirement. As fund members, we have a responsibility to take control of our financial education regarding our retirement savings. 

Without discipline and short-term sacrifice, we will not be able to attain the long-term benefits of saving enough money for a retirement that is free from financial-related stress, even if we try to blame Sars for our ill-informed decisions.

* Ladouce is a pension funds lawyer and the author of the book ‘Pensions for Palookas’.

PERSONAL FINANCE