Less than a month since the implementation of the two-pot retirement system, the surge in withdrawal applications continues and Sanlam says it is gaining a deeper understanding of some of the most common questions and misconceptions based on client conversations across its call centres, social media, and other channels.
The imperative to address client questions and clarify misconceptions while reminding clients of both the opportunity and the risks in withdrawal scenarios cannot be understated, says Roxanne Tobias, Actuary & Head of Marketing and Communications at Sanlam Risk & Savings.
The two-pot retirement system presents a significant shift in how South Africans can access their retirement savings. While it offers more flexibility, it's also crucial to guide clients to understand the risks and nuances of this new system so that they can make informed decisions about their retirement funds without compromising their long-term financial security. Below are five common misconceptions identified following the first two weeks since the two-pot retirement system came into effect.
Receiving instant payment
Roxanne notes that many South Africans believed they would receive an immediate payout after applying for a withdrawal, with some expecting automatic payments without needing to apply for a withdrawal. Two-pot withdrawal applications are multi-faceted and cannot be compared with transactional withdrawals from a financial institution like a bank. South African retirement and tax legislation present strict processes that must be followed to ensure compliance when an individual wants to withdraw funds from retirement savings and this, typically, takes more time to process in reality.
The process includes submitting required documentation to a financial services company or retirement fund administrator, followed by a client details vetting process, confirmation of the availability of funds for withdrawal, and applying for a tax directive from SARS, which is required before any payment can be made.
You can withdraw R30 000 of retirement savings, regardless of what’s available in your savings pot
Another misconception is the belief that everyone with a retirement fund has access to or will receive R30 000, regardless of the amount of savings available in their savings pot. When the two-pot system went live beginning of September, the savings and retirement pots were added to the retirement vehicle of every retirement fund member, and both pots had a balance of zero.
“The savings pot balance received a once-off “boost”, commonly referred to as seeding, from the money in the vested pot of existing retirement savings. This boost amount was calculated as 10% of the balance in the vested pot but subject to a maximum of R30 000. The exact amount available to each member to withdraw, is calculated based on how much each individual fund member has available in their savings pot. There is therefore no guarantee of access to an amount of R30 000", says Roxanne.
You will be able to withdraw R30 000 from your retirement savings every year
There is an assumption that individuals will be able to withdraw R30 000 annually from their savings component which is not the case. In any given tax year an individual will have access to one withdrawal to the value of what’s available in their savings pot at the time. Every time that you withdraw from your savings pot, the balance in your savings pot is reduced with the amount that you withdrew.
Roxanne adds that the value of an individual’s savings pot at any point in time will equal the initial once-off seeding amount plus one-third of all contributions from 1 September 2024 onwards and the investment growth there on less any previous withdrawals. If your savings pot had a balance of R30 000 on 1 September 2024, and you withdrew this full amount in the current tax year, you will only be able to withdraw whatever is available in your savings pot in the following tax year which may be significantly less than R30 000.
For someone who contributes R3 000 per month to their retirement fund, only R1 000 will go to their savings pot monthly. This means that over a 12-month period, the balance of the savings pot will increase with R12 000 due to these contributions ignoring growth on the existing balance in the savings pot. If for this member the balance of their savings pot was zero at the start of this 12-month period, it means that after 12 months there will only be R12 000 available to this member to withdraw the following year.
If you don’t withdraw what is available to you, you will lose the money
An interesting observation by Sanlam is that there seems to be fear amongst some South Africans that they will forfeit the money that they don’t withdraw from their savings pot or that it will disappear in some way. On the contrary, any funds that have not been accessed remain in your savings pot (component), and the investment will continue to grow. The accessible portion is yours to manage, but there is no disadvantage to leaving it untouched. Keeping your savings invested, means that you benefit from compound interest, boosting your retirement fund over time.
Roxanne adds that people are also mistaken if they think that they can withdraw money from their retirement savings and can simply “catch up" later. “Catching up on your retirement savings needs becomes increasingly difficult the longer you wait to save, and the more you withdraw - due to the power of compound interest. To replace a savings withdrawal amount and its potential growth, you would need to invest significantly more in your retirement fund than the original amount that you withdrew. This is because the new contributions have less time to compound and grow before you retire."
South Africans should heed the long-term implications before withdrawing their retirement funds and Sanlam encourages them to get advice on financial decisions as significant as this. What might seem like a modest sum today can make a considerable difference to one’s quality of life in retirement.
Taxes won’t affect your withdrawal
A key step in the savings pot withdrawal process is the tax directive application, which dictates how SARS will tax your savings pot withdrawal amount. The withdrawal amount will be taxed at your current tax rate, which will depend on your total taxable income in the tax year, including the withdrawal from the savings pot. The income tax as well as any outstanding tax debt, will be deducted from the withdrawal amount before it is paid to you.
“South Africans must seek expert advice from a professional financial adviser when navigating the two-pot retirement system to avoid surprises. While the system is designed to offer flexibility by balancing immediate access to retirement savings with long-term security, it is essential to understand how it works and the long-term implications of withdrawal on your retirement savings. This way, you can make informed decisions that meet your present needs without compromising your future financial goals", concludes Roxanne.
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