As funds fielded R4.1bn in savings pot withdrawal applications in the first week of the two-pot system, the industry warned the public against taking regular large amounts from their life savings.
Retirement solutions providers have called the first week since the two-pot system went live a historic milestone for South Africa’s retirement industry and a massive task for the sector and regulators to manage.
Old Mutual retirement reform executive Michelle Acton told Business Times that while one large withdrawal from a person's savings could be considered, it was essential to avoid consistent patterns of withdrawing large amounts.
“Going forward, a third of your contributions will be allocated to the savings pot and two-thirds to the retirement pot. If you empty your savings pot every month that is essentially a third of your savings gone.”
She said the average member would need about 12 times their annual salary to be able to retire at the same living standard they had while working. This requires a contribution of about 15% over 40 years if the member does not withdraw from their savings at all.
When the two-pot system went live on September 1, the retirement savings of each working South African were separated into two pots — a savings pot and a retirement pot; with a third vested pot containing the savings accumulated until August 31. This pot is not subject to the new rules.
When the new rules kicked in, 10% of a retirement or provident fund member's existing savings — capped at R30,000 — was transferred into the savings pot and made available immediately for withdrawal.
The South African Revenue Service (Sars) said since September 1 it had received a total of 161,607 tax directive applications, 159,853 or 98.9% of which relate to savings withdrawal benefits, at an average of 17,964 tax directive applications a day.
The gross amount involved in these applications was R4.1bn.
Sars commissioner Edward Kieswetter said when an individual withdrew from their fund, they would be taxed at their marginal tax rate.
“Applications for tax directives are submitted to Sars by the fund administrator via eFiling. The directive indicates to the fund how much tax should be withheld by the fund on behalf of Sars before payout.
“Taxpayers who owe Sars money must realise that this tax debt will be added to the tax on withdrawal from the savings benefit. But if there are payment arrangements in place to settle the debt with Sars, this debt will be deducted as per agreement between Sars and the taxpayer.”
Munaf Mukadam, investments wealth manager at Gradidge Mahura — a boutique private wealth management firm — said while occasional withdrawals from life savings in case of emergencies were understandable, regular large withdrawals from the savings pot would reduce savings and cost a member potential tax incentives.
“If you deplete your savings component by making withdrawals, you pay the tax as per your marginal tax rate, and then at retirement, if you don’t have anything in your savings component then you can’t utilise that tax free portion.”
Allan Gray head of retail operations, Jonathan Turner said: “Members will be able to make one withdrawal (of R2,000 or more) per tax year before retirement, but it is highly recommended that they do not, except when they find themselves in a real financial emergency and not withdrawing would lead to a worse financial outcome.”
Nedgroup Investments senior legal adviser Denver Keswell said the two-pot retirement system has had a bigger impact on stand-alone and umbrella employment retirement funds than it has on retail funds.
“Employment funds like pension and provident funds have received a large number of requests for withdrawals. We have anticipated that retail funds like retirement annuities and preservation funds will receive a lot [fewer] requests for withdrawals from the savings pot.”
I guess it’s encouraging to see that our members are able to understand the negative impacts of withdrawals on their retirement savings as well as the adverse consequences of tax on these withdrawals
— Denver Keswell, Nedgroup Investments senior legal adviser
He said Nedgroup Investments so far had received only 12 requests for withdrawals over the first week, with tax directives applied for and received in all 12 cases and the benefits already paid out.
“I guess it’s encouraging to see that our members are able to understand the negative impacts of withdrawals on their retirement savings as well as the adverse consequences of tax on these withdrawals.”
He said the quantum amount of withdrawals was proportionally small as they were limited to R30,000 per contract. “However, we do fear that these numbers will be much larger at employment retirement funds.
“Withdrawals have traditionally been taxed as a ‘withdrawal lump sum benefit’ which allows one up to R27,500 tax-free. Withdrawals from the savings pot are now taxed as income which is at the member’s marginal rate of tax.
“This means that a retirement fund member could pay tax up to a rate of 45%, which is substantially higher than they would have been taxed prior to September 1. Withdrawals from your vested pot will still, however, be taxed as a ‘withdrawal lump sum benefit’.”
The executive for solutions and enablement at Alexforbes, John Anderson, said despite initial challenges, they were working through an unprecedented level of claims, with the number and value far exceeding expectations.
“[A total of] 78,000 claims have been received and are being processed. This is equivalent to the number of claims we were processing over a 6-month period before the new legislation.
“The total value of claims currently being processed stands at R1.5bn. Of this, we estimate at least R270m will be paid in taxes.”
He said the claims were at various stages, including awaiting Sars directives and completing bank validations, with many payments being processed.
“As South Africa’s largest retirement fund administrator, Alexforbes has received and processed the highest volume of claims in the industry. We expect this level of activity to continue in the coming weeks.”
He said collaboration between retirement fund administrators, employers, advisers, Sars, the Financial Sector Conduct Authority, and the Association for Savings and Investment South Africa highlighted the resilience and strength of the industry.
The level of activity also highlighted how important retirement fund investments were in the lives of individuals, and the new system had resulted in a significant increase in engagement levels.
Government Pensions Administration Agency (GPAA) spokesperson Mack Lewele said the Government Employees Pension Fund (GEPF) had received just over 55,000 applications since the beginning of September and all the requests would be subjected to due processes before they were paid.
“The amounts claimed differ from person to person and depend on a personal choice as well as what each individual qualifies for or has in their savings pot.
“We have to verify the validity — if clients qualify for the amounts they claim — of all the claims before we can determine the final amount. Pronouncing on that at this point could be misleading and force us to correct it at a later stage. We will announce this as soon as payments go through.”
Cosatu's parliamentary liaison officer Matthew Parks said the labour federation planned to propose more reforms to the two-pot system in future consultations. He said the National Treasury had agreed to an amendment to allow workers to tap into the preservation pot in the event of retrenchment.
Cosatu hoped the government would consider granting access to further relief for workers from their existing savings, reducing the tax burden on low-income workers, full access to savings when unemployed, and the use of funds for educational purposes.
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