Pension funds must first apply for a tax directive from Sars before paying out a claim under the two-pot retirement system.
The South African Revenue Service (Sars) has received a total of 2 153 942 tax directive applications under the two-pot retirement system by Monday this week with a total gross value of over R35 billion. While it is a once-off boost for consumer spending and consumption, it does not make a dent in the pension fund’s capital reserves.
If consumers use this money to pay off debt, it could have a positive impact, but if it is used to buy things during the holiday season, it will have a negative effect on the long-term financial stability of these consumers, an economist says.
Sars says since the inception of the two-pot retirement system it observed an unprecedented and steady increase in tax directive applications that likely reflects the economic challenges households face.
So far Sars issued 1 914 306 directives issued with a total gross value of R35 052 572 876.62. Unfortunately, Sars did not say how much that meant in tax for government coffers.
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This is why some applications under the two-pot retirement system were declined
According to Sars:
- 169 509 applications were declined for a myriad of reasons, ranging from systems failures at the fund management entities to issues such as incorrect identification numbers and tax numbers
- 41 523 tax directives were declined due to issues such as insufficient funds and incorrect codes
- 28 525 tax directives were cancelled by taxpayers who changed their minds.
Sars says its simulated WhatsApp calculator was used 53 693 times since implementation, while the simulated calculator on the Sars website which is part of the Sars Online Query System was used 850 375 times.
In addition, Sars also received 102 839 queries through its voice channel and another 17 627 queries at its branches, as well as a further 66 048 on its USSD channel.
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Sars received 1.2 million applications under the two-pot retirement system by 11 October
In early October Sars said by then it received 1 213 646 applications for tax directives under the two-pot retirement system but declined more than 200 000 because some of the applicants lied about their taxable income. Sars only approved 1 148 729 tax directives for funds to be released.
Then Sars said that a total gross lump sum of R21.4 billion was paid but it also did not give information about how much of this was deducted for tax.
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Sars gets helped first when you want to withdraw
Before a final amount is paid out, Sars informs the pension fund to also deduct any outstanding debt on behalf of Sars. If you have a debt arrangement with Sars, the withdrawal will not be affected. If you do owe Sars money for tax, it is deducted and paid over to Sars.
Many people already found that they had tax outstanding with Sars after they applied to withdraw from their savings pots and some received no payouts because the whole amount was spent on repaying Sars.
Once an application is sent to Sars to request a tax directive, it cannot be withdrawn when the applicant finds that there is an amount owing to Sars.
You must be registered as a taxpayer at Sars to withdraw from the savings pot under the two-pot retirement system. If you are not registered for tax, Sars will reject the request for a tax directive from your pension fund.
If you withdraw an amount from the savings pot before retirement, your marginal tax rate will apply to the amount withdrawn.
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What the R35 billion from the two-pot retirement system means for the economy
What does the R35 million in money paid out under the two-pot retirement system mean for the South African economy? George Herman, chief investment officer at Citadel, says the R35 billion injection serves as a one-time stimulus to boost consumption expenditure.
“This will likely contribute approximately 0.2% to South Africa’s gross domestic product (GDP) a notable lift that complements the positive sentiment already building within the country under our Government of National Unity (GNU).”
He says this improved consumer confidence is a strong indicator of a healthier economic environment. “The stimulus is expected to primarily benefit the retail sector, which has already seen positive reactions, as evidenced by gains in banking and retail stocks in response to this development.”
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What do the two-pot retirement system withdrawals mean for pension funds’ capital?
What does it mean for the capital reserves of the pension funds? Herman says the good news is that the R35 billion is relatively insignificant within the broader context of South Africa’s pension fund assets.
“To put it into perspective, the Public Investment Corporation (PIC) alone manages R2 trillion on behalf of the government employee pension fund. When combined with other major funds, such as the Eskom and Transnet pension funds, the total climbs to approximately R3 trillion.
“In this context, R35 billion represents a very small proportion and does not affect these large funds in any meaningful way. While it may cause a minor reduction in Assets Under Management (AUM) for asset managers, it remains relatively negligible in the grander scheme.”
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What does the R35 billion in two-pot retirement system withdrawals mean for consumers?
What does the R35 billion mean for consumers? Herman says when evaluating the implications for consumers, it is crucial to view this in context. “Sars facilitated withdrawals totalling R35 billion from over 1.9 million directives. This translates to an average withdrawal of around R26 000 per consumer.
“For consumers, receiving these funds often brings a sense of relief. If used to pay off debt, it could have a positive impact, as it involves converting a long-term investment to settle liabilities, thereby strengthening their balance sheet.”
However, he says if these funds are spent on immediate consumption, it echoes the old adage of ‘selling the silverware to buy groceries,’ which is never a sound long-term strategy.
“Unfortunately, given the realities of South African consumers, particularly those within specific income brackets, there is a high likelihood that much of this money will be spent during the holiday season.”
Herman warns that this shift from long-term pension savings to short-term consumption poses a significant risk to the long-term financial stability of these consumers.
