South Africa introduced the Two-Pot Retirement System to help people access part of their retirement savings before retirement age, while keeping the rest for retirement. It's a helpful system –  but it comes with tax rules that can surprise some people.

If you withdrew from your Two-Pot in the tax year, you might be surprised when you file your tax return and find out you owe SARS money.

Read on to find out why..

What Is the Two-Pot Retirement System?

As of 1 September 2024, retirement savings are now split into:

• Savings Pot: You can withdraw from this once per tax year (subject to a minimum amount of R2,000).
• Retirement Pot: This is locked until you retire.
• Vested Pot: This is the money saved up to 31 August 2024 before the new system started.

The Savings Pot is what most people withdraw from during the year — and that’s the one that can affect your tax.

What Happens When You Withdraw from the Savings Pot?

When you make a withdrawal from the Savings Pot, your fund will apply for a tax directive from SARS which will show how much tax must be deducted before funds are paid to you. The fund administrator typically includes your latest taxable income in the tax directive application to SARS. They get this amount from your most recent IRP5 or your latest tax assessment.

Your savings pot withdrawal is treated like income by SARS, which means the amount you withdraw is added to your annual income. You are taxed on it using the same tax rates as your salary or other income.

But here's the catch: SARS might not take enough tax up front when you withdraw.

Two reasons you might have to “pay in” when you file:

1. Not enough PAYE was withheld on the savings pot withdrawal.
   The retirement fund may have withheld only a small amount of tax, or even none at all, especially if your income is normally below the tax threshold. This would happen when the taxable income on your tax directive is lower than what you actually earned. SARS expects the correct tax on your total income, so they calculate the extra you owe when you file your tax return.

2. Your total income pushed you into a higher tax bracket.
   The withdrawal may have moved you into a higher tax bracket, meaning your total income is taxed at a higher rate. Since your employer and the fund didn’t withhold enough tax based on the combined income, you have to make up the difference when you submit your tax return.

Example: How This Works

How to Avoid Surprises Next Time

• Speak to your fund when you withdraw and ensure they withhold tax.
• Use TaxTim’s two-pot calculator to assist with your workings.
• Use TaxTim’s SARS Calculator to estimate your total tax for the year.
• Set aside some money for tax when you withdraw if you suspect not enough was withheld.

For further details on the two-pot retirement system and its tax effects, please click here