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Taxpayers Beware: Over 200,000 South Africans Risk Penalties Over Two-Pot Retirement System Withdrawals

The South African Revenue Service (SARS) has raised alarms over the growing number of taxpayers trying to avoid taxes linked to withdrawals from the new two-pot retirement system. With over R43 billion already paid out, more than 2.4 million applications for tax directives have been approved, but many others have been flagged for tax evasion.
SARS Commissioner Edward Kieswetter has issued a stern warning to the 213,654 taxpayers who deliberately understated their income to qualify for a lower tax rate. This kind of behavior could lead to serious penalties as it directly undermines the country’s tax system, and Kieswetter has urged taxpayers to approach the two-pot system with caution.
The Two-Pot Retirement System and Its Tax Implications
The new two-pot system allows South Africans to access a portion of their retirement funds earlier, but this flexibility comes at a cost. Withdrawals are taxed at the individual’s marginal rate, which ranges from 18% to 45%, depending on their income bracket. This means high earners could face steep tax deductions, and some might even find themselves in a higher tax bracket after making withdrawals.
For those tempted to use early withdrawals as a quick financial fix, Kieswetter emphasized that the tax directives are final and irreversible. Misleading SARS about taxable income in an attempt to avoid paying taxes is illegal, and penalties will be enforced for those found guilty.
Financial Experts Warn of the Long-Term Costs
While SARS is focused on ensuring tax compliance, financial experts are cautioning taxpayers about the long-term risks of withdrawing from retirement savings too early. Coronation, a prominent fund manager, has pointed out that while the two-pot system offers short-term flexibility, it could undermine long-term financial security.
One key concern is the loss of compounded growth. For example, withdrawing R1 from a retirement savings account at age 35 could reduce the retirement value by R6 by the time an individual retires, simply due to the disruption of compounding. Coupled with the tax burden, these early withdrawals may have lasting negative effects on a taxpayer’s future financial security.
The Bottom Line: Plan Ahead and Stay Compliant
With 213,654 taxpayers identified for underreporting their income, SARS is urging South Africans to reconsider the temptation to make early withdrawals. Both tax penalties and the long-term impact on retirement savings should serve as strong motivators to stick to the rules.
Taxpayers are encouraged to carefully plan their finances before tapping into their retirement funds. Understanding the full scope of the two-pot system and the tax implications can help ensure that South Africans make informed choices that will safeguard their financial future.
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