By Brett Ladouce
The undisputed winner of the Savings Pot Withdrawal race that started on September 1 is Sars. Millions, if not billions, of rands will flow into the state coffers in the next few months as we dip into our retirement savings at the speed of light thanks to the well-recorded, and declared, efficiency of retirement funds and fund administrators. The race is on to see which fund or administrator can pay out the most money to their members in the quickest time possible.
As the warning shots have been fired, and fund members have been informed of the pros and cons of accessing their Savings Pots before retirement, fund members are off to the races without a second thought about the tax implications of their decisions to make an early withdrawal from their retirement fund savings.
Firstly, all withdrawals from your Savings Pot will be taxed at your marginal income tax rate of between 18% and 45% and not on the progressive rate of the lump sum withdrawal benefit scale that taxes lump sum cash withdrawal benefits at a rate of between 0% and 36%. Put differently, if you withdraw R30 000 from your Savings Pot, you will pay income tax of between R5 400 and R13 500 leaving you with only between R16 500 and R24 600 in your bank account. If you take the R30 000 as a cash lump sum withdrawal benefit when you leave the fund, the tax liability will only be R450, and you will be left with R29 550 in your bank account as the first R27 500 of the withdrawal benefit will be paid out to you tax-free.
Secondly, Sars will deduct any outstanding tax debt that you have and in relation to which you have not made any payment arrangements with Sars. If you therefore owe Sars R20 000, they will take the R20 000 from the after-tax withdrawal amount to settle the outstanding tax debt. You can therefore easily join the group of fund members who end up with nothing being paid into their bank accounts after their interaction with Sars.
Thirdly, the withdrawal will reverse the tax deduction that you received on your fund contributions (and you will never get it back!) and potentially push you into a higher tax bracket. The amount that you take from your fund will be added to all the other income that you earn for that specific tax year and thus increase your taxable income for that year. You will therefore pay more tax not only on the amount that you withdraw, but also on all the other income that you earn in that tax year.
Fourthly, annual withdrawals from your Savings Pot will reduce the tax-free lump sum benefit that you can take at retirement. If you join a fund after September 1, contribute R350 000 per year to your retirement fund and you make annual withdrawals from your Savings Pot, you might only have about R116 000 in your Savings Pot at retirement. You can thus only take R116 000 as a tax-free lump sum retirement benefit and the benefit of an additional R434 000 in tax-free money at retirement will be lost.
If you have not already made a withdrawal from your Savings Pot, please wait until the “Euphoria” around the withdrawals has died down and contemplate if you need the money for a real emergency or to kill a high-interest Debt Drake-on. If not, you might be tempted to keep on making annual withdrawals from your Savings Pot and end up with no lump sum benefit at retirement, giving those who retire comfortably the right to say, they “Not Like Us”.
Lump Sum Withdrawal Tax Table
| Taxable income (R) | Rate of tax |
| 1 – 27 500 | 0% of taxable income |
| 27 501 – 726 000 | 18% of taxable income above 27 500 |
| 726 001 – 1 089 000 | 125 730 + 27% of taxable income above 726 000 |
| 1 089 001 and above | 223 740 + 36% of taxable income above 1 089 000 |
(Savings Pot) Income Tax Table
| Taxable income (R) | Rates of tax (R) |
| 1 – 237 100 | 18% of taxable income |
| 237 101 – 370 500 | 42 678 + 26% of taxable income above 237 100 |
| 370 501 – 512 800 | 77 362 + 31% of taxable income above 370 500 |
| 512 801 – 673 000 | 121 475 + 36% of taxable income above 512 800 |
| 673 001 – 857 900 | 179 147 + 39% of taxable income above 673 000 |
| 857 901 – 1 817 000 | 251 258 + 41% of taxable income above 857 900 |
| 1 817 001 and above | 644 489 + 45% of taxable income above 1 817 000 |
* Ladouce is a pension funds lawyer and the author of the book, Pensions for Palookas.
PERSONAL FINANCE