With the introduction of the two-pot retirement system in South Africa in March 2024, individuals now have more flexibility when it comes to accessing their retirement savings. However, this flexibility comes with specific tax implications that individuals need to understand, especially regarding how the South African Revenue Service (SARS) taxes withdrawals from the new system. This article will walk you through how to calculate SARS tax and other relevant taxes concerning the two-pot system, including what to consider when withdrawing funds and how taxes affect your long-term retirement savings.

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Key Concepts in the Two-Pot System

Before diving into the tax calculations, it’s essential to understand how the two-pot system works. The system splits your retirement savings into two parts:

1. The Retirement Pot: Two-thirds of your contributions go into this pot and are preserved for retirement. You cannot access these funds until you reach retirement age (typically 55).
2. The Savings Pot: One-third of your contributions go into this pot. This part of your savings is more flexible, and you can withdraw from it under certain conditions before retirement.

Taxation in the Two-Pot System

The South African tax system, administered by SARS, taxes your income, savings, and withdrawals according to different rules. In the case of the two-pot system, you need to be aware of two types of taxes:

1. Tax on Contributions: Contributions to both pots are typically made on a pre-tax basis, meaning you receive tax deductions when you contribute to your retirement fund.
2. Tax on Withdrawals: Withdrawals from the Savings Pot are taxed at your marginal tax rate as income. Withdrawals from the Retirement Pot are taxed according to the retirement tax tables when you access them after retirement.

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Tax on Contributions to the Two-Pot System

Contributions to your retirement fund under the two-pot system are tax-deductible up to a certain limit. SARS allows a tax deduction of up to 27.5% of your taxable income or remuneration, whichever is higher, subject to a maximum of R350,000 per year. This tax deduction applies to both the Retirement Pot and the Savings Pot.

Example of Tax-Deductible Contributions:

• If your annual taxable income is R500,000, the maximum deductible contribution would be 27.5% of R500,000, which equals R137,500.
• This amount is divided between the Retirement Pot and the Savings Pot, with two-thirds going into the Retirement Pot and one-third into the Savings Pot.

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Tax on Withdrawals from the Savings Pot

The flexibility of the two-pot system allows you to withdraw from your Savings Pot before retirement under specific conditions (e.g., financial hardship). However, withdrawals from the Savings Pot are subject to income tax at your marginal tax rate, just like any other income you earn.

Understanding Marginal Tax Rates:

SARS uses a progressive tax system, meaning the more you earn, the higher the percentage of tax you pay. The tax brackets for individual taxpayers for the 2023/2024 tax year are as follows:

Taxable Income (R)	Tax Rate (%)
0 – 237,100	18%
237,101 – 370,500	26%
370,501 – 512,800	31%
512,801 – 673,000	36%
673,001 – 857,900	39%
857,901 – 1,817,000	41%
Above 1,817,000	45%

Example of Withdrawal Tax Calculation:

• Suppose you earn R400,000 a year, placing you in the 31% tax bracket.
• You decide to withdraw R20,000 from your Savings Pot.
• This withdrawal is added to your taxable income, making your total taxable income R420,000.
• The R20,000 withdrawal will be taxed at 31%, so R6,200 will be deducted as tax, and you will receive R13,800 after taxes.

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Tax on Withdrawals from the Retirement Pot

Withdrawals from the Retirement Pot are treated differently and only become accessible after you retire (or under specific conditions like permanent disability). SARS taxes withdrawals from the Retirement Pot according to the retirement lump sum tax tables.

Retirement Lump Sum Tax Table (as of 2023/2024):

Lump Sum Amount (R)	Tax Rate (%)
0 – 550,000	0% (tax-free)
550,001 – 770,000	18% of the amount above R550,000
770,001 – 1,155,000	39,600 + 27% of the amount above R770,000
Above 1,155,000	143,550 + 36% of the amount above R1,155,000

Example of Retirement Pot Tax Calculation:

• If you withdraw R800,000 from your Retirement Pot at retirement:
• The first R550,000 is tax-free.
• On the remaining R250,000, you pay 18% tax.
• 18% of R250,000 is R45,000 in tax.
• The net amount you receive would be R755,000 (R800,000 – R45,000).

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Other Important Considerations

1. Penalties for Early Withdrawals from the Retirement Pot

Withdrawals from the Retirement Pot before retirement age (other than for specific reasons like permanent disability) can lead to penalties. In most cases, you won’t be able to access this portion of your savings until retirement.

2. Tax-Free Portion of Retirement Lump Sum

The first R550,000 of your total retirement lump sum is tax-free, but this limit applies across all retirement funds. If you have multiple retirement funds and withdraw from each, the total lump sum tax-free portion is still capped at R550,000.

3. Tax Planning

Because withdrawals from the Savings Pot are taxed as income, they can push you into a higher tax bracket, increasing the amount of tax you pay. Therefore, it’s crucial to plan withdrawals carefully to avoid unnecessary tax burdens. Consult with a financial advisor or tax professional to optimize your retirement savings and withdrawals.

4. Tax on Death Benefits

If you pass away before retirement, your beneficiaries can access both the Retirement Pot and Savings Pot. These amounts will be taxed according to the retirement tax tables or the deceased’s tax rate, depending on the circumstances.

5. No Double Taxation

You are not taxed twice on contributions to the two-pot system. Contributions are made from pre-tax income, and the tax is only applied when you withdraw funds from your Savings Pot (before retirement) or Retirement Pot (at retirement).

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Pros and Cons of Taxation in the Two-Pot System

Pros

• Tax Deductibility of Contributions: You can reduce your taxable income by contributing to your retirement fund.
• Tax-Free Lump Sum: You can withdraw up to R550,000 tax-free from your Retirement Pot when you retire.
• Financial Flexibility: The ability to withdraw from your Savings Pot before retirement allows for better financial management in times of need.

Cons

• Income Tax on Withdrawals: Withdrawals from the Savings Pot are taxed as income, which can be significant depending on your marginal tax rate.
• Limited Access to Retirement Pot: You cannot access the Retirement Pot until you reach retirement age or in cases of severe hardship, which may limit liquidity.
• Higher Tax Brackets: If you withdraw a large sum from your Savings Pot, it may push you into a higher tax bracket, leading to higher tax rates on your income.

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Conclusion

The two-pot system offers flexibility in managing retirement savings but comes with various tax implications that individuals need to consider. Understanding how SARS taxes contributions, withdrawals, and retirement lump sums is essential for maximizing your retirement benefits while minimizing tax liabilities.

For those looking to make the most of the two-pot system, careful tax planning and consultation with a financial advisor can go a long way in ensuring you meet your financial goals both before and after retirement. Always be aware of the current tax rates and rules, as these can change from year to year based on government policy updates.