Many investors only discover after contributing to a retirement annuity that the funds are not freely accessible until retirement, often leading to frustration, especially during times of financial difficulty. While these limitations may feel unfair, it’s important to understand both the rationale behind them and the benefits that RAs offer within the broader retirement framework.
The rationale behind retirement fund restrictions
Government has long incentivised retirement savings through a range of tax concessions. Individuals are allowed to contribute up to 27.5% of their taxable income, capped at R350 000 per year, to retirement funds, including RAs, on a tax-deductible basis. This effectively means that investors are saving with pre-tax money, which is a significant advantage. In addition to this upfront tax deduction, RAs are tax-efficient investment vehicles in that no tax is payable on interest earned, dividends received, or capital gains realised within the fund.
In exchange for these generous tax breaks, legislation restricts access to ensure that the funds are used solely for retirement purposes – bearing in mind that, without these restrictions, there would be a strong temptation for individuals to withdraw and use these savings for short-terms needs, which could ultimately undermine long-term financial security and increase the burden on the state.
How the two-pot system changes things
As most retirement fund investors know, South Africa implemented the Two-Pot Retirement System effective 1 September 2024. This reform affects how future contributions to retirement funds—including RAs, pension funds, and provident funds—are allocated, and under what circumstances they can be accessed. Under the new system, each member’s retirement fund contributions will be split as follows:
- One-third to the Savings Component, which can be accessed once per tax year, subject to a minimum withdrawal of R2 000.
- Two-thirds to the Retirement Component, which remains preserved until the investor reaches retirement age (currently 55 for RAs) or qualifies for early retirement due to disability.
In addition, an initial ‘seed capital’ amount, called the Vested Component – introduced on 1 September 2024 – comprises the investor’s fund value as at 31 August 2024, along with any pre-implementation growth. This vested portion remains subject to the old retirement fund rules, meaning that it cannot be accessed before age 55, except in very specific circumstances.
What this means for existing RA investors
If you already have a retirement annuity and were contributing to it before 1 September 2024, your fund now consists of three components:
- Vested Component, being the value accumulated before 1 September 2024. This portion is governed by the old rules in that it is not accessible until age 55, unless the fund value is below a certain level, you become permanently disabled, or you have been a tax non-resident for at least three consecutive years.
- Savings Component, being one-third of contributions made from 1 September 2024 onwards. This portion may be withdrawn once a year, subject to a minimum amount of R2 000 and applicable tax.
- Retirement Component, being the remaining two-thirds of post-implementation contributions. This portion remains inaccessible until retirement.
The most significant change for investors is the introduction of limited early access to the Savings Component. However, note that this does not apply retroactively to the vested portion, meaning the amount available for withdrawal may still be modest in the early years, depending on your level of contribution.
Exceptions to the access rules
Even under the new system, retirement funds (including the vested portion of RAs) remain largely inaccessible until retirement, except under the following conditions:
- Fund value is below R15 000: If the entire value of your RA is less than R15 000, you may withdraw it in full, provided you are not contributing to any other retirement fund.
- Disability: If you are permanently disabled, you may access the full value of your RA, subject to approval by the fund’s board of trustees and SARS.
- Tax emigration: Since 1 March 2021, individuals can no longer access their RA simply by financially emigrating via the South African Reserve Bank. Instead, emigrants must prove that they have been a non-resident for South African tax purposes for at least three consecutive years, based on SARS guidelines. Once this requirement is met, the full value of the RA may be withdrawn and will be taxed accordingly.
Tax on withdrawals
Withdrawals from the savings component under the Two-Pot System will be taxed at marginal rates, not according to the retirement tax tables. This means the amount withdrawn will be added to your taxable income for the year and taxed accordingly. On retirement, the rules remain as follows:
- You may take up to one-third of your RA benefit in cash, which will be taxed according to the retirement lump sum table.
- The remaining two-thirds must be used to purchase a compulsory annuity, which will provide you with a regular income during retirement and will be taxed as income in your hands.
Planning forward
While the Two-Pot System introduces some flexibility, especially for individuals who may experience financial distress during their working lives, the underlying purpose of a retirement annuity remains unchanged, with its primary function to help individuals build long-term financial security in a tax-efficient manner.
If you are facing financial difficulty and considering a withdrawal from your savings component, it’s crucial to approach this decision with caution, keeping in mind that a withdrawal today could reduce the amount available to you at retirement and may push you into a higher tax bracket for the current tax year. Further, where your retirement annuity is structured for long-term growth, early access will interrupt your compounding returns.
The introduction of the Two-Pot System represents an important evolution in retirement planning, offering a compromise between immediate liquidity and long-term preservation. That said, before making a withdrawal from your retirement funds, it’s prudent to consult with an independent financial advisor who can assess your financial position holistically and help you make informed decisions.
Have a beautiful day.
Sue
