Being tax-savvy and fee-smart when you’re saving for retirement, and when you’re retired, can have a massive impact on your retirement savings and income. The introduction of the two-pot system in September 2024 has further highlighted the importance of being tax-aware.

Since its introduction, approximately R43.4 billion has been paid out to individuals from their savings components, with SARS anticipating a total tax collection of approximately R12 billion.

That’s a significant amount not ending up in South Africans’ pockets. Pre-retirement withdrawals from the two-pot savings pot are taxed at a taxpayer’s marginal rate. In some cases, a withdrawal may even push you into a higher tax bracket, increasing your overall tax burden. In addition, administration fees, sometimes as high as 4%, can be applied to each withdrawal.

So, how can you be more tax-savvy when it comes to the most important investment you’ll ever make? As always, it depends on the stage you’re at.

Each stage of the retirement savings journey requires a different game plan to ensure tax efficiency.

Tax wins when you’re saving for retirement

Retirement fund contributions towards a Reg28 product are tax-deductible up to 27.5% of your gross salary or taxable income (capped at R350,000 annually). This means that you can minimize the income you’ll be taxed on, by investing in a retirement product that meets the Regulation 28 standards (you can read more about Regulation 28 here and here).  If you invest in multiple retirement funds, this tax relief applies to your total retirement portfolio.

If you’re fortunate enough to reach the 27.5% cap annually, the tax relief doesn’t end there. Should a substantial bonus come your way, invest it in a Reg 28 retirement product. Even if the investment exceeds the annual tax-deductible cap, the surplus amount will simply roll over to the next tax year. And if this surplus amount is still rolling on into your retirement years, it can reduce the taxable amount on your available cash lump sum OR reduce your taxable income from a living annuity.

So, if you’re still in your working years, keep this tax advantage in mind.

Tax-savvy considerations upon retirement

If you opt to receive a cash lump sum upon retirement, the first R550,000 of the lump sum remains tax-free. If the lump sum is more than R550,000, you can deduct your excess Reg 28 contributions as mentioned above.

Spreading out withdrawals over several years, rather than making one large withdrawal, can also minimize your tax burden. Senior Stan, one of the retirees we interviewed last year, contributed this tip. He also emphasized the need for careful planning in the event that you’re considering withdrawing more than R550,000 at retirement. “Consider doing a cash-flow analysis to determine any need for additional capital, against current marginal tax rates to decide whether the withdrawal would be worthwhile.” A little planning here can go a long way.

Be more tax-savvy and fee-smart

Circling back to two-pot withdrawals, it’s critical to consider all cost implications before you withdraw from your savings pot pre-retirement. The amount you withdraw is not the amount that will end up in your bank account! And it will have a substantial impact on your retirement income. As always, consult with a financial advisor on all tax-related matters, as these waters are best navigated with a trusted professional by your side.

Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.