Two-Pot Withdrawals: What They Really Cost You

Since 1 September 2024, most South Africans who belong to a pension fund, provident fund or retirement annuity have had access to a savings pot. One-third of new contributions go into it, and two-thirds go into a retirement pot that stays locked until retirement. Many members have already made a withdrawal. Before you make yours, it is worth understanding what that money really costs.

How the savings pot works

You can make one withdrawal per tax year, which runs from 1 March to the end of February. The minimum withdrawal is R2,000, and you can take up to the full balance of your savings pot. The same rules apply to pension funds, provident funds and retirement annuities.

Cost 1: Tax at your highest rate

A savings-pot withdrawal is not taxed at a special low rate. SARS adds it to your income for the year and taxes it at your marginal rate, the same rate that applies to the top slice of your salary, with no tax-free portion. A large withdrawal can even push part of your income into a higher bracket. The tax is deducted before you are paid, using a tax directive your fund obtains from SARS.

Cost 2: Fees

Most funds charge an administration fee on each withdrawal. It is usually a fixed amount, which means it takes a bigger bite out of smaller withdrawals. Ask your fund for its current fee before you apply.

Cost 3: The growth you give up

This is the cost most people overlook. Consider someone whose top rate of tax is 31% and who withdraws R30,000. Roughly R9,300 goes to tax, so they receive about R20,700 before fees. If that R30,000 had instead stayed invested and grown at an assumed 10% a year, it could be worth around R200,000 after 20 years. In other words, a R20,700 payout today could cost close to ten times as much in retirement.

This example is illustrative only. Actual tax depends on your total income for the year, and investment returns are not guaranteed.

When a withdrawal can still make sense

The savings pot was designed for genuine emergencies. If your alternative is an expensive loan, a credit card or an informal lender, a withdrawal may be the lesser evil. For Muslim families, avoiding an interest-bearing loan can be a legitimate reason in itself. The key is to compare the true cost of each option rather than treating the savings pot as an annual bonus.

Before you apply

• Check whether an emergency fund or other savings could cover the need instead.

• Ask your fund for your exact savings-pot balance and withdrawal fee.

• Use the two-pot calculator on the SARS website to estimate the tax.

• Withdraw only what you need, not the full balance by default.

Talk to us first

A short conversation can save you thousands. Sapphire Global can help you weigh a withdrawal against your other options and keep your retirement plan on track. Get in touch to book a review.

This article is general information only and does not constitute financial advice. Please speak to a qualified financial adviser about your personal circumstances.