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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

Staff, students, learners and the public opened their hearts during R5 coin-laying ceremony

2012-07-17

Photo: Sonia Small
18 July 2012

Amidst a festive atmosphere on the Red Square in front of the Main Building on the Bloemfontein Campus of the University of the Free State (UFS), students, staff, learners and members of the public came together to make their contribution to stop hunger.

In celebration of former president Nelson Mandela’s birthday, the university collected money and food in the form of a coin-laying ceremony, the packing of food parcels, and a message delivered by Emeritus Archbishop Desmond Tutu in aid of the university’s No Student Hungry (NSH) campaign and Bloemfontein Child Welfare.

Representatives from schools in Bloemfontein donated their R5 coins, together with university staff, students, members of the public, and employees of Pick n Pay Hyper. Money collected at the coin-laying ceremony will be shared between NSH and Bloemfontein Child Welfare.

According to Ms Grace Jansen and Ms Carin Buys, patrons of NSH, the more than R42 000 that was collected will be donated to Bloemfontein Child Welfare in an effort by NSH to give back to the community. “We are impressed by the number of people who showed up and by the fact that people opened their hearts and pockets to give,” said Ms Buys.

Thirty employees of Pick n Pay Hyper in Bloemfontein were also present and packed 1 833 food parcels (equivalent to 11 000 meals). This forms part of a Pick n Pay initiative in cooperation with Stop Hunger Now that is being held countrywide today.

In total, 88 000 meals will be distributed in six cities in South Africa today. The 11 000 meals in the Free State have been donated to the university and according to Ms Jansen a social worker at the UFS will distribute it to other needy students. These are students who do not receive bursaries from NSH at the moment. Every food parcel contains rice, dried vegetables, soya, and vitamin and mineral enriched powder.

The university was honoured to have Emeritus Archbishop Desmond Tutu as the speaker at the event. He attended a dialogue in the Series of Dialogue between Science and Society today at the university where he took part in a conversation with Profs. Mark Solms and Pumla Gobodo-Madikizela as part of the Global Leadership Summit.

He made a special appearance at the university’s Nelson Mandela Day festivities. His message was simple but inspiring: “Everyone has, just like Madiba, the capacity to change lives. I hope there are people present who can say that they want to improve someone else’s life. You have the chance to make South Africa a country where no one goes to bed hungry. Help us to make South Africa a country where we have compassion for each other and care for each other”.

The UFS would like to thank the following schools for their contributions:

Grey Kollege Primêre Skool
Grey Kollege
St Michael's School for Girls
Hoërskool Jim Fouché
Hoërskool Fichardtpark
Hoërskool Sentraal
Navalsig High School
HTS Louis Botha
Eunice High School

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