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Demystifying the two-pot retirement system

20 August 2025 | Story Dr Annelize Oosthuizen | Photo Supplied

Opinion article by Dr Annelize Oosthuizen, Subject Head of Taxation in the School of Accountancy, University of the Free State

With the two-pot retirement system having been effective from 1 September 2024, it is important to demystify certain aspects to prevent an unpleasant surprise when you retire. Although there are other complex rules, this article was simplified and does not deal with exceptions. It also does not deal with members of a provident fund who were 55 years of age or older on 1 March 2021. Furthermore, reference to retirement funds is to a pension fund, provident fund or a retirement annuity fund (a discussion on preservation funds is therefore excluded).

Three, not two pots

Firstly, there are effectively three pots and not two.

The first pot is referred to as the vested component. You will only have this component if you were a member of a retirement fund prior to 1 September 2024. This component consists of the member’s interest (balance) in the retirement fund on 31 August 2024 (the day before the implementation of the two-pot system) after being reduced with the amount of the seed capital that was transferred to the savings pot (see below). This seed capital amount was calculated as the lesser of 10% of the value of the member’s interest in the fund on 31 August 2024 or R30 000. No further contributions will be allocated to this component from 1 September 2024. Upon retirement, one-third of the funds in this component can be taken in the form of a lump sum. The balance will be transferred to the retirement component below and will be paid out in the form of monthly annuities.
The second pot is the savings component. The opening balance of the savings component is the seed capital that was transferred from the vested component above. Thereafter, from 1 September 2024, one third of your monthly contributions to the retirement fund are allocated to this component.
The third pot is the retirement component. From 1 September 2024, two-thirds of your monthly contributions to the retirement fund are allocated to this component. The funds in this component can only be accessed upon retirement (i.e. after reaching your retirement age, which is stipulated in the fund rules). Furthermore, upon retirement, the money in this pot is only paid out in the form of monthly annuities (i.e. monthly pensions) and no lump sum can be taken from this pot unless its total value is R165 000 or less.

Withdrawals are taxed unfavourably

Secondly, withdrawing from the savings component before retirement has adverse tax implications.

From 1 September 2024 onwards, one is allowed to make an annual withdrawal (minimum of R2 000) from the savings component even if you have not yet reached your retirement age and although you are still employed. It is, however, important to remember that such withdrawals are taxed very unfavourably since they are taxed by using the normal progressive tax tables that apply to your other income such as salary. If you wait for your retirement and only withdraw from this savings component upon retirement, the first R550 000 will be tax-free and withdrawals above R550 000 will be taxed at rates much lower than the current progressive tax rates applicable to other income.
Upon retirement, only the money in the savings component is allowed to be taken as a lump sum. If you therefore withdraw all the money from this pot annually prior to retirement, you will not have any funds available to access as a lump sum on retirement and will only have access to the monthly annuities payable from your retirement component.

Less funds available

Lastly, for those members who have a vested component (i.e. who became members of the retirement fund before 1 September 2024), the old rules still apply to the funds in that component. Therefore, upon retirement, you will still be able to take one third of the value of your vested component as a lump sum. The balance will be transferred to the retirement pot and will be paid out in the form of monthly annuities.

To summarise, even though it might appear lucrative to withdraw from your savings component annually, it is advised that you refrain from doing it unless you really need the funds to fulfill basic needs. Withdrawing prior to retirement has the following adverse consequences:

Money withdrawn from the savings component is taxed at higher rates than what would have applied had you reached your retirement age and retired. You will therefore not make use of the R550 000 tax-free option.
You will have less funds available to pay out as a lump sum on retirement. As a simple calculation, had you not withdrawn R30 000 in a single year, conservatively calculated at a rate of 5%, this R30 000 would have grown to R79 599 (R139 829 if a rate of 8% is used) calculated over 20 years that can be withdrawn tax-free when utilising the R550 000 tax-free portion on retirement.

News Archive

UFS to honour past and present Cabinet ministers

2010-04-19

The University of the Free State (UFS) is going to confer honorary doctoral degrees on former Minister of Arts, Culture, Science and Technology, Dr Ben Ngubane, and the current Minister of Finance, Mr Pravin Gordhan, during the university’s autumn graduation ceremony next month.

They will receive their honorary doctorates on 18 and 19 May respectively.

“It is an honour for the UFS to confer these honorary doctorates on people like these who have made, and continue to make outstanding contributions towards the wellbeing of this beautiful country. Being associated with people of this stature signifies the direction that the UFS is taking in our quest to be a great university, one of the best in the world,” said Prof. Jonathan Jansen, the Rector and Vice-Chancellor of the UFS.

Dr Ngubane will be honoured for his immense contribution towards positioning South Africa as a major and an influential player in the development of arts, culture, science and technology internationally.

He was the first Minister of Arts, Culture, Science and Technology in the new, democratic South Africa appointed by the former President, Nelson Mandela, in 1994. He was re-appointed to lead this ministry again by former President Thabo Mbeki in 1999.

As Premier of KwaZulu-Natal from 1996 to 1999, Dr Ngubane is credited for his role in bringing about peace and reducing the political violence that ravaged the province at that time.

In 2004 he was appointed as Ambassador to Japan where he initiated, among other projects, the South Africa-Japan University Forum (SAJU).
He has been honoured for outstanding contributions to higher education and community development and holds Honorary Doctorates from the universities of Natal, Zululand, the Medical University of South Africa (Medunsa) and the Tshwane University of Technology.

He is currently the Chairperson of the SABC Board.

Minister Gordhan, on the other hand, formed an integral part of the constitutional transition of South Africa between 1991 and 1994. He chaired the Convention for a Democratic South Africa (CODESA) Management Committee – the midwife and negotiating forum for a free South Africa. He was also co-chair of the Transitional Executive Council, which was a governance structure tasked with ensuring South Africa’s transition process prior to the historic 1994 elections.

In 1994, with the dawn of a new democracy in South Africa, Mr Gordhan became a Member of Parliament and was elected as Chairperson of the Parliamentary Constitutional Committee, which oversaw the implementation of the new constitutional order. At the same time he played a leading role in drafting the present constitution of the democratic South Africa. He also led the process of formulating a new policy framework for local government transformation.

Mr Gordhan was appointed as Deputy Commissioner at the South African Revenue Service (SARS) in March 1998 after being deployed from Parliament as part of the government’s drive to transform the public service. The following year he was appointed as Commissioner for SARS with the important task, amongst others, to transform South Africa’s Customs and Revenue administration – a strategic governmental institution.

He has represented South Africa in many international undertakings, including several peacekeeping missions, as Chairperson of the Customs Workshop for the Second Global Forum on Fighting Corruption and Safe-Guarding Integrity (2001), and is often called upon to make presentations at tax seminars and customs conferences.

In 2000 he was appointed Chairperson of the Council of World Customs Organisation (WCO), based in Brussels, a position to which he was re-elected twice, thus serving from 2000 to 2006.

Media Release
Issued by: Mangaliso Radebe
Assistant Director: Media Liaison
Tel: 051 401 2828
Cell: 078 460 3320
E-mail: radebemt@ufs.ac.za
19 April 2010

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