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20 August 2025
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Story Dr Annelize Oosthuizen
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Photo Supplied
Dr Annelize Oosthuizen, Subject Head of Taxation in the School of Accountancy, University of the Free State.
With the two-pot retirement system having been effective from 1 September 2024, it is important to demystify certain aspects to prevent an unpleasant surprise when you retire. Although there are other complex rules, this article was simplified and does not deal with exceptions. It also does not deal with members of a provident fund who were 55 years of age or older on 1 March 2021. Furthermore, reference to retirement funds is to a pension fund, provident fund or a retirement annuity fund (a discussion on preservation funds is therefore excluded).
Three, not two pots
Firstly, there are effectively three pots and not two.
- The first pot is referred to as the vested component. You will only have this component if you were a member of a retirement fund prior to 1 September 2024. This component consists of the member’s interest (balance) in the retirement fund on 31 August 2024 (the day before the implementation of the two-pot system) after being reduced with the amount of the seed capital that was transferred to the savings pot (see below). This seed capital amount was calculated as the lesser of 10% of the value of the member’s interest in the fund on 31 August 2024 or R30 000. No further contributions will be allocated to this component from 1 September 2024. Upon retirement, one-third of the funds in this component can be taken in the form of a lump sum. The balance will be transferred to the retirement component below and will be paid out in the form of monthly annuities.
- The second pot is the savings component. The opening balance of the savings component is the seed capital that was transferred from the vested component above. Thereafter, from 1 September 2024, one third of your monthly contributions to the retirement fund are allocated to this component.
- The third pot is the retirement component. From 1 September 2024, two-thirds of your monthly contributions to the retirement fund are allocated to this component. The funds in this component can only be accessed upon retirement (i.e. after reaching your retirement age, which is stipulated in the fund rules). Furthermore, upon retirement, the money in this pot is only paid out in the form of monthly annuities (i.e. monthly pensions) and no lump sum can be taken from this pot unless its total value is R165 000 or less.
Withdrawals are taxed unfavourably
Secondly, withdrawing from the savings component before retirement has adverse tax implications.
- From 1 September 2024 onwards, one is allowed to make an annual withdrawal (minimum of R2 000) from the savings component even if you have not yet reached your retirement age and although you are still employed. It is, however, important to remember that such withdrawals are taxed very unfavourably since they are taxed by using the normal progressive tax tables that apply to your other income such as salary. If you wait for your retirement and only withdraw from this savings component upon retirement, the first R550 000 will be tax-free and withdrawals above R550 000 will be taxed at rates much lower than the current progressive tax rates applicable to other income.
- Upon retirement, only the money in the savings component is allowed to be taken as a lump sum. If you therefore withdraw all the money from this pot annually prior to retirement, you will not have any funds available to access as a lump sum on retirement and will only have access to the monthly annuities payable from your retirement component.
Less funds available
Lastly, for those members who have a vested component (i.e. who became members of the retirement fund before 1 September 2024), the old rules still apply to the funds in that component. Therefore, upon retirement, you will still be able to take one third of the value of your vested component as a lump sum. The balance will be transferred to the retirement pot and will be paid out in the form of monthly annuities.
To summarise, even though it might appear lucrative to withdraw from your savings component annually, it is advised that you refrain from doing it unless you really need the funds to fulfill basic needs. Withdrawing prior to retirement has the following adverse consequences:
- Money withdrawn from the savings component is taxed at higher rates than what would have applied had you reached your retirement age and retired. You will therefore not make use of the R550 000 tax-free option.
- You will have less funds available to pay out as a lump sum on retirement. As a simple calculation, had you not withdrawn R30 000 in a single year, conservatively calculated at a rate of 5%, this R30 000 would have grown to R79 599 (R139 829 if a rate of 8% is used) calculated over 20 years that can be withdrawn tax-free when utilising the R550 000 tax-free portion on retirement.
Sarah, our own champion
2008-11-05
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| Sarah Shannon at the Paralympic Games in Beijing |
Sarah Shannon, a second-year student in the Postgraduate Certificate in Education, has been involved in disability sport on national level for the past 12 years. Sarah has cerebral palsy.
In 1996 she participated at the South African National Championships for the physically disabled for the first time, entering for several sporting codes and winning five gold medals. In swimming she participates in the S3 class together with other swimmers that have comparable abilities to hers.
In 1997 she decided to focus on swimming competitively. She participated in her first national championships for swimming that year. After that (1998) she represented South Africa on international level at the International Paralympic Committee’s (IPC) Swimming World Championships in New Zealand where she ended 4th in the 50m backstroke and 7th in both the 50m and 100m freestyle in her class.
In 1999 she represented South Africa in Johannesburg at the 7th All Africa Games and won a silver medal for the 50m freestyle and a bronze medal for the 100m freestyle.
In 2000 she was part of the South African team at the Sydney Paralympic Games where she reached the finals and finished 7th in the 50m backstroke and 8th in the 50m freestyle. Northern-KwaZulu-Natal also awarded her the Junior Sportswoman of the Year award in 2001. In 2002 she participated at the South African Senior National swimming championships for KwaZulu-Natal in the multi-disability category.
In 2005 she completed the Midmar Mile. She also represented South Africa at the world championships for athletes with cerebral palsy in Boston in the United States of America. She won two gold medals for respectively the 50m freestyle and the 50m backstroke and two silver medals in the 100m and 200m freestyle. She was also nominated to represent South Africa as athlete’s representative on the world committee of CPISRA (Cerebral Palsy International Sports and Recreation Association). In this year Sarah also received the KwaZulu-Natal Premier’s Sportswoman with a disability award of the year.
In 2006 she qualified for the IPC world championships but could not attend.
In 2007 she represented South Africa once more at the Visa Paralympic World Cup in Manchester in the United Kingdom where she broke the South African record in the 50m backstroke, finishing 7th in the 50m freestyle and 6th in the 50m backstroke.
She was also part of the very successful Team South Africa to the Paralympic Games in Beijing. She reached the finals in both the 50m backstroke and 50m freestyle. She finished 7th in the 50m freestyle and 6th in the 50m backstroke in personal best times for both events. She has been participating in the able bodied South African National Swimming Championships since 2002. She is currently ranked 2nd in the world for short course items and 11th for the long course items. She is truly our best swimmer in the S3 class.