South African Pensioners Struggle with Hefty Taxes Under Two-Pot Retirement System

The implementation of the two-pot retirement system in South Africa has left many pension fund members grappling with unexpected high tax rates when withdrawing from their savings for emergencies. This new system, effective since September last year, aims to provide flexibility by allowing members to access a portion of their retirement savings ahead of schedule. However, the tax implications have proven to be a significant deterrent.

Under the two-pot system, members can dip into the savings component of their retirement funds before retirement but face marginal tax rates. Vickie Lange from Alexforbes highlighted that the intended tax incentives to discourage such withdrawals aren't well understood, and come as a rude shock to many. Such withdrawals should ideally only occur in dire financial need, as accessing funds early eliminates the tax-free benefits applicable upon reaching retirement, under which the first R550,000 is non-taxable.

The structural operation of the system has also come under criticism. If members owe any tax, SARS (South African Revenue Service) ensures its collection upfront by withholding the necessary amount from the withdrawal. Unfortunately, this has led to situations where members have received zero funds post-tax. According to Sanlam's recent figures, about 1,731 of the 130,398 claims resulted in no disbursement due to existing tax debts.

Furthermore, a survey by JustMoney reveals widespread dissatisfaction among consumers, emphasizing the unforeseen tax burdens and calling the process stressful and unfair. The sentiment reflects a growing frustration with a system that seems to further impoverish the already struggling pensioners.

COSATU (Congress of South African Trade Unions) has stepped forward as a vocal critic of these practices. In September, the union called upon the National Treasury to reconsider the tax implications for low- and middle-income workers who access their savings under this system. COSATU has expressed deep concerns regarding SARS's approach to automatically deduct any outstanding tax debts from the pensions, pushing many into deeper financial hardship.

SARS had processed 2,153,942 tax directive applications by November, with the total claims reaching over R35 billion, indicating the widespread use of the two-pot system. However, the high rate of zero-disbursements highlights a critical need for policy review and more supportive measures for pension holders.

The ongoing situation calls for a more balanced approach that considers the financial realities of retired workers facing pressing financial needs. Negotiations and reviews by relevant bodies, including engagements between COSATU, the Treasury, and SARS, are urgently needed to devise a fairer tax mechanism that aligns with the economic pressures faced by modern South Africans.