Following on from our series of articles regarding the two-pot retirement system, let’s take a closer look at the practical steps you will need to undertake should you be considering this option.
Retirement fund members expecting to withdraw some of their money once the two-pot system kicks in on the 1st September should familiarise themselves with the withdrawal requirements and processes. The new two-pot system is being implemented to give members access to some of their retirement savings in times of great need while at the same time, forcing the preservation of two-thirds of retirement savings from the 1st September 2024. This approach hopes to prevent members cashing in their retirement savings due to economic pressures.
The process will start with 10%, to a maximum of R30 000, being moved from members’ existing retirement savings into their new savings component from the 1st September 2024. This is a once-off event aimed at giving members the opportunity to withdraw some money if they are under economic strain. The withdrawal process will be determined by individual retirement funds. What is concerning though is that very few funds have published the process that their members need to follow.
To facilitate an effective communication process, it is suggested that members (whether through their employers or directly) ensure that their contact details and personal details at the fund are 100% correct. This will ensure that communications are not missed and that the possibility of hiccups at the withdrawal/ claiming stage do not hamper the pay-out process. Employees who do not have income tax numbers will need to urgently obtain one.
Once a withdrawal is requested the funds will do the necessary paperwork on their side. This includes applying for a tax directive from the South African Revenue Service (SARS). Please note that it is the fund’s responsibility to apply for the tax directive and not the employer.
We expect certain employees who currently may not earn enough to pay tax to now exceed that threshold and be required to pay tax. We suspect that the minimum tax deduction will be at the 18% marginal tax rate. This is also another opportunity for SARS to recover taxes, penalties or interest on outstanding taxes. Employees must also not forget that the fund will be deducting a processing fee before paying out the balance. This could leave employees with a payout of significantly less than what they were expecting.
The first step of the two-pot system is the responsibility of fund administrators as they must do the ‘seeding’ calculations and then transfer 10% (to a maximum of R30 000) of each member’s existing retirement savings on the 31st August 2024 into the savings pot. The balance in the savings pot must be R 2 000 or more before a withdrawal can be made.
Once the ‘seeding’ process has been done, the qualifying fund members can submit their applications in the format determined by their fund. The fact that the money is available does not mean that it will automatically be paid out. The processing time frame is not known at this point as the volume of applications is unknown. The first few weeks of September will likely be extremely busy, so applicants must expect delays. Again, applicants are warned to ensure that their affairs are in order to prevent further delays.
Fund members are reminded that it is vitally important to carefully consider the implications of making a claim under this new system. Part of this process may be asking for professional advice from a retirement fund advisor and/or tax practitioner. Drawing money from a fund formed to provide retirement benefits could have costly implications down the line when it comes to the quantification of actual retirement benefits. Replacing that withdrawal may take a long time or even be impossible. The benefits of such a short-term gain may be far outweighed by the tax, administrative costs and investment loss if the funds had remained in the fund until retirement.
So where to from here?
Funds are only just starting to publish details of the application process. Some are going to have an app to facilitate the process, while others may use their existing portals to do so. Employers need to be aware that this is a transaction between the employee and the fund and that they have no obligation to get involved in the administrative process. Most employers do not have the required skills or licenses in the benefits and tax space to provide advice to employees considering a claim. Employers must refer employees to the fund and their own tax practitioners to have their questions answered.
As further information becomes available, we will update you via our newsletter. However, as mentioned above, it is recommended to get specialist advice before deciding to withdraw any funds. We are here if you need to chat about your options – contact us today.