Having access to capital for anything is an ongoing challenge for a lot of South Africans. Most people rely on their salaries for capital, personal loans and other streams of income (side hustles). Looking at the dire need for additional income, the government allowed South Africans to access their pension funds before retirement. This is called the two-pot system.
The two-pot system which started on the 1st of September 2024, has been a huge talking point since its establishment. According to the South African Revenue Services (SARS), a gross lump sum of around R 21,4 billion has been paid out to South Africans who have applied to use their Savings Withdrawal Benefit of the two-pot system.
How Does The Two-Pot System Work?
Speaking to SME South Africa, Metropolitan, a licensed life insurer and an authorised financial services provider, explains that SARS has allocated a savings pot where a third of your retirement savings contributions will be allocated. You are allowed to make one withdrawal a tax year subject to a minimum amount of R 2 000 (before charges, tax or transaction costs).
Additionally, a retirement pot where the remaining two-thirds will be kept for funding your income when you are retired. You are not able to access your retirement pot until you are retired.
“The government realises that many citizens are often in need of emergency funds. For this reason, qualifying members can access a portion of their retirement savings for financial emergencies without leaving their current employer,” Metropolitan says.
Tax Implications of the Two-pot System Withdrawals
According to Metropolitan, two-pot withdrawals are taxed at a marginal tax rate. A marginal tax rate means that the tax you pay depends on your income bracket.
Arrear tax: Another tax implication is arrear tax deductions. This means that before any money is paid out from your savings pot, arrear tax (if applicable) will be deducted by SARS.
Withdrawal fees: SARS implements a withdrawal fee of R 300 for each deduction. The tax is then calculated on the net withdrawal amount after deduction of the fee.
Metropolitan says that it applied for a tax directive on behalf of its clients. If the client has an outstanding tax debt, the company will deduct it from your two-pot withdrawal amount before you receive it.
“Above the minimum tax threshold, different rates will apply to the taxable income bands starting at 18% and up to 45% for the highest income earners. If you owe any money to SARS (arrear tax), they can deduct that, and it will reduce the amount you receive even further,” Metropolitan explains.
As much as the company is dedicated to helping its clients receive their two-pot fees, it does not encourage any heavy withdrawals. The company says that retirement policies are in place to help South Africans be able to support themselves after their retirement and advises that most people don’t withdraw unless for emergencies.
“We (Metropolitan) strongly advise that South Africans preserve their retirement policies wherever possible. Members should also prepare for unexpected expenses by saving for them separately, instead of using retirement savings. Having savings in another product can help clients face financial challenges and keep all their retirement savings for their future.”
Pension Withdrawals for Small Business Financing
For small to medium-sized enterprise (SME) owners, being able to access capital from their retirement fund is a benefit. SMEs in South Africa struggle with getting access to funding solutions.
Access to funding is an issue for SMEs because of reasons such as:
- Most SMEs are not registered with the Companies and Intellectual Property Commission (CIPC).
- Some SMEs do not have high turnovers which are (sometimes) a requirement for funding.
- Some SMEs are hindered by strict regulations and laws.
For these reasons, SME owners will be looking to use their two-pot system allowances to finance some of their business needs. Pension-led funding allows you to fund any part of your business which needs to be financed.
Because the capital is your own (bootstrapping), you can use it for various things. These can be cash flow, playing suppliers, paying employees, buying stock or inventory or expanding your business.
As much as the two-pot savings is a solid option to financing your business, Metropolitan says that small business owners must do a deep-dive into their finances before applying. The company explains that SARS requires all applicants to provide accurate and relevant financial information when applying for withdrawals and for some SMEs this information is not available.
“We believe that entrepreneurs should rather apply for funding, but we understand that this is not always possible. If you are going to withdraw to finance your business, we recommend that you make withdrawals only after consulting with a Financial Advisor,” Metropolitan emphasises.
Withdrawing from your pension to finance your business is a great idea but has long-term consequences. If you believe that your business needs funding from your pension, read this article to make a more informed decision.
