Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

The short answer to your question is no.

Let me go through what has been proposed so that you can understand what the proposals look like.  I will also run through the factors that you should be taking into account should you ever decide to withdraw money from your retirement fund.

While the proposal talks about two pots there are actually three, with the third one being the vested pot. 

Vested pot

The vested pot consists of all your retirement savings that you will have made up until the 28th of February 2024. The current rules regarding that investment would largely still apply. This means that you cannot take out a third of your retirement savings before you retire.

The proposed two-pot system will come into effect on 1st of March 2024. 

Retirement pot

This will consist of 2/3 of any retirement savings that you make from 1 March 2024.  You will only be able to access these funds when you retire. This would be anytime from the age of 55 onwards. This means that should you change jobs, you will not be able to access these funds like you can do now (which is usually a good thing).

 I have found that when changing jobs, many people use their pension fund money to clear short-term debt or do renovations on their properties.  They often do not appreciate how much additional money needs to be invested in their retirement funds going forward to make up the funds that they have used when they accessed these retirement funds. As a result, they often do not have enough money to live on when they retire. 

Many people look at their retirement savings and think that they have enough because the amounts are large.  However, when it is converted into an income stream, you may find that it is not enough to support your desired lifestyle.  A rough rule of thumb is that you will need R1 million in retirement savings to fund a monthly income of R4 000 before tax.  So, if you want to live on R40 000 a month when you retire, you will need around R10 million in retirement savings. 

Savings pot

1/3 of your retirement savings can go into a savings pot. You will be allowed to make annual withdrawals from this pot.  I would, however, recommend that you exercise caution when considering withdrawing funds from your retirement savings.  As you can see from the example above, there is a good chance that you will need a larger sum to retire on than you think.

At the moment, when you withdraw money from a retirement fund, a special table of taxes apply. Under the new regime, you’ll be taxed at your marginal rate.  If your tax rate is above 27%, you are probably going to be in a worse position than you are now. 

You must remember that the proposals are still proposals at this stage and that there are likely to be changes before they are implemented next year.

Retirement savings do offer one of the best ways of providing tax efficient capital growth to secure your future when you’re no longer working. You need to think very carefully before accessing these funds to deal with short term issues.