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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

Unique programme for next generation of professors launched

2010-11-19

Some of the scholars taking part in the Vice-Chancellor's Prestige Young Scholars Programme are, from the left: Dr Andréhette Verster, Ms Liezel Kotzé and Dr Nthabeleng Rammile.
Photo: Stephen Collett

The University of the Free State (UFS) has launched a programme that will provide an accelerated pathway to 25 young scholars with recent PhDs and teach them how to become professors through intensive local and international mentorship, research support and academic training.

The Vice-Chancellor’s Prestige Programme for Young Scholars focuses on the next generation of top researchers in South Africa who will fill the gap left by retiring academics. It will also add significantly to the diversity of the professoriate at the UFS.

No other university in the country has a programme of such scale and intensity for building excellence and diversity through young scholars.

“The programme is highly selective and limited to the most promising young scholars at the university. It will also contribute towards establishing an international reputation for the university and positioning the UFS as one of the best research institutions in the country,” said Prof. Neil Roos, Director of the Postgraduate School at the UFS. He will manage the programme together with Prof. Jackie du Toit, also from the university.

Running for the next three years, the programme will put the 25 scholars through an intensive programme of academic and scholarship support which includes advanced theoretical and methodological training and exposure to leading international scholars in their fields. They will also be exposed to intensive reading and writing programmes, high-level seminar and conference participation and presentation, accelerated publication schedules and personal mentoring and advising plans.

“Scholarship will only grow if there is a critical mass – and this is what we want to achieve at the UFS. We want to create a pool of young scholars, develop and connect them with international scholars and place them at top universities in the world where they can be mentored by the best in their respective fields,” said Prof. Jonathan Jansen, Vice-Chancellor and Rector of the UFS at the launch of the programme.

According to Prof. Jansen, the UFS aims to draw public intellectuals and A-rated scientists to the campus and make academic work attractive to academics at the university and countrywide.

The group of scholars has a good academic record, with 69% of them completing their PhDs within the last five years. The group is well represented in terms of race and gender; the majority are in the 26 to 30-year age group and specialisations include the social sciences (including education, the humanities and arts) as well as the natural sciences.

“Scholarship develops over time. We are proud and extremely honoured to be selected for this prestigious programme. With this scholarship we acknowledge the responsibility of building the UFS and of extending our knowledge across disciplines. We will establish a scholarly advancement for our university that will enable it to compete with the best in the world,” said Dr Nalize Marais, one of the prestige scholars.

The launch was also attended by members of the university’s International Advisory Council (IAC). This council, which visited the university the past week to advise the leadership on its future positioning strategies, especially in relation to its international aspiration to become a place of scholarship and service among the leading universities in the world, congratulated the UFS on this groundbreaking programme.

“You are lucky to have a leadership that dares to dream and that can act the dream. You are fortunate that your leadership wants to take this university forward and explore new horizons,” said Prof. Aki Saweyrr, former Secretary-General of the Association of African Universities in Ghana and member of the IAC.

Ending the evening’s programme was Dr Gansen Pillay, Vice-President of the National Research Foundation. Prof. Gansen also congratulated the UFS on its visionary and inspirational leadership. “It is a privilege to make a life-changing contribution to research in the world. Universities must take ownership of their own development – which is exactly what the UFS is doing. And, although this is a truly South African programme, it could have an impact on the rest of the world,” he said.

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