How the Two-Pot system is affecting retirement funds

THE Two-Pot system, designed to offer South Africans a lifeline in the event of a serious rainy day, has seen such high demand for withdrawals that experts are concerned that people will have only two-thirds of their savings left.

- NICOLA MAWSON

Changes in the law, which came into effect last September, made it possible for people who have retirement savings to access a portion of them now, with the rest remaining invested until they stop working. Under the changes to the law, one-third of retirement savings went into a pot from which withdrawals could be made, and that allows people to pull out money once a year in an amount between R2 000 and R30 000.

But there are drawbacks. In addition to the fact that the cash that is taken is subject to tax, any amount due to the South African Revenue Service (Sars) in unpaid tax is deducted from the payout. Those are the short-term consequences — longer-term, withdrawals now will exacerbate South Africa’s already low savings rate. South Africans have a negative savings rate of 1.2%, according to Trading Economics.

Hwalani Mabaso, executive of everyday advice and distribution at Absa Advice and Investments, says that the tax on withdrawals “came as a rude awakening to some who saw their expected payout significantly reduced. Financial service providers also had to play catch-up, with reports of some charging excessive admin fees. The learning curve was steep — not just for members, but for the industry itself,” she notes.

Michelle Hawkins, senior tax expert at PKF Octagon, says that Sars has collected R15 billion in taxes from Two-Pot withdrawals, of which R1bn was in overdue payments.