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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 boasts with world class research apparatus

2005-10-20

At the launch of the diffractometer were from the left Prof Steve Basson (Chairperson: Department of Chemistry at the UFS), Prof Jannie Swarts (Unit for Physical and Macro-molecular Chemistry at the UFS Department of Chemistry), Mr Pari Antalis (from the provider of the apparatus - Bruker SA), Prof Herman van Schalkwyk (Dean: Faculty of Natural and Agricultural Sciences at the UFS), Prof André Roodt (head of the X-ray diffraction unit at the UFS Department of Chemistry) and Prof Teuns Verschoor (Vice-Rector: Academic Operations at the UFS).

UFS boasts with world class research apparatus
The most advanced single crystal X-ray diffractometer in Africa has been installed in the Department of Chemistry at the University of the Free State (UFS).

“The diffractometer provides an indispensable technique to investigate compounds for medicinal application for example in breast, prostate and related bone cancer identification and therapy, currently synthesized in the Department of Chemistry. It also includes the area of homogeneous catalysis where new compounds for industrial application are synthesised and characterised and whereby SASOL and even the international petrochemical industry could benefit, especially in the current climate of increased oil prices,” said Prof Andrè Roodt, head of the X-ray diffraction unit at the UFS Department of Chemistry.

The installation of the Bruker Kappa APEX II single crystal diffractometer is part of an innovative programme of the UFS management to continue its competitive research and extend it further internationally.

“The diffractometer is the first milestone of the research funding programme for the Department of Chemistry and we are proud to be the first university in Africa to boast with such advanced apparatus. We are not standing back for any other university in the world and have already received requests for research agreements from universities such as the University of Cape Town,” said Prof Herman van Schalkwyk, Dean: Faculty of Natural and Agricultural Sciences at the UFS.

The diffractometer is capable of accurately analysing molecules in crystalline form within a few hours and obtain the precise geometry – that on a sample only the size of a grain of sugar. It simultaneously gives the exact distance between two atoms, accurate to less than fractions of a billionth of a millimetre.

“It allows us to investigate certain processes in Bloemfontein which has been impossible in the past. We now have a technique locally by which different steps in key chemical reactions can be evaluated much more reliable, even at temperatures as low as minus 170 degrees centigrade,” said Prof Roodt.

A few years ago these analyses would have taken days or even weeks. The Department of Chemistry now has the capability to investigate chemical compounds in Bloemfontein which previously had to be shipped to other, less sophisticate sites in the RSA or overseas (for example Sweden, Russia and Canada) at significant extra costs.

Media release
Issued by:Lacea Loader
Media Representative
Tel: (051) 401-2584
Cell: 083 645 2454
E-mail: loaderl.stg@mail.uovs.ac.za
19 October 2005

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