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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

Course on sustainable development recognised at COP 17

2011-12-07

Some participants of the PED Nexus Programme during a field trip are from left: Jacques van Zuydam, Chief Director: Population and Development at the national Department of Social Development; Prof. André Pelser, course coordinator (UFS); Prof. Sosten Chiotha, Director, LEAD Southern and Eastern Africa; and Dr Nola Redelinghuys, course facilitator (UFS).

The University of the Free State (UFS) received a nod of approval at the COP 17 Climate Change Conference in Durban for a short course it presents in partnership with the Chief Directorate Population and Development, United Nations Populations Fund (UNFPA), LEAD International and SANParks.

The UFS received an honourable mention in a press release from the Department of Social Development for the short course entitled ‘Leadership Training in Sustainable Development: The Population, Environment and Development (PED) Nexus’. The release was issued as part of COP17. It mentions that the course is recognised in a publication of the United Nations Development Programme (UNDP) as one of ten innovative experiences and best practices in population and development in the developing world.

Prof. André Pelser, UFS Professor in Sociology, says the university played a key role in the development and implementation of the course. The UFS has been presenting the course since its inception in 2005. Similar courses under the banner of the PED Nexus, although in a totally different format, are also presented at the Nelson Mandela Metropolitan University and the University of Cape Town. A total of 21 courses have been presented nationwide since 2005, of which the UFS has hosted eight. More than 230 participants from all over the world have been trained in these eight short nine-day courses.

The PED Nexus Programme focuses on the interrelationships of population, environment and development and its significance for sustainable human development and is closely linked to the implementation of the national Population Policy for South Africa. The press release reads that the programme is implemented in the form of short courses that target professionals and managers in governments at all levels as well as non-governmental agencies responsible for the implementation of programmes related to sustainable development.

Prof. Pelser and Dr Nola Redelinghuys, also from the Department of Sociology, have recently been tasked by the National Department of Social Development to upgrade the course outline. The next course will run from 17-25 April 2012. As in the case of pervious courses, the first six days will be hosted on our main Campus in Bloemfontein, whereafter course participants and their facilitators depart to the Golden Gate Highlands National Park for the practical part of the course.

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