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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

Publication on indigenous knowledge systems

2005-10-21

Dr Otsile Ntsoane (acting Director: IKS, Department of Science and Technology) and Prof Philip Nel (Director: Africa Studies at the UFS and guest editor of the publication) at the launch of the publication

UFS launches most comprehensive publication on indigenous knowledge systems
A unique collection of essays on Indigenous Knowledge Systems (IKS) was launched yesterday (20 October 2005) by the University of the Free State’s (UFS) Programme of Africa Studies.

The essays are published as a special edition of INDILINGA, the African Journal for Indigenous Knowledge Systems and is an outcome of the colloquium on Indigenous Knowledge Systems that was presented last year by the UFS Director of Africa Studies in cooperation with the National Research Council.

“The amount and diversity of materials on IKS brought together under one cover is unique as there are no other South African publications of this magnitude on this issue. It contains papers of international experts on IKS such as Prof Fritz Wallner from Austria and Prof Gayatri Spivak, foremost postcolonial theorist from India,” said Prof Philip Nel, Director of Africa Studies and guest editor of the publication.

“The publication is a rich source field for students and scholars to exploit because most of the sources quoted in the articles are recent, fresh and relevant. The contributors are largely people responsible for managing, fostering and studying IKS in a responsible manner,” said Prof Nel.

“An added value of the publication is the inclusion of the policy document on IKS that was adopted by Cabinet in November 2004,” said Prof Nel.

“Millions of people in South Africa are faced with the painful choice of abandoning their heritage. In this choice, the study and management of IKS has a major role to play; on the one hand, to encourage as much assimilation of traditional knowledge as possible into the modern systems, and on the other hand to provide a “language” and a “grammar” for indigenous people through which they can access modernity,” said Prof Nel.

The IKS debate involves questions of African identity, protection of indigenous communities and practices, political aspects as well as the scientific integrity of the enterprise.

The publication displays the range of burning questions that have to be resolved in this field such as mainstreaming IKS in academic debate and practice, recognition and protection of the knowledge holders, bio-prospecting and bio-piracy, bio and ethnic healing, lack of textbooks and field manuals, etc and will prove worthwhile for future researchers.

“One of the main reasons for publishing this volume is the fact that IKS should be studied not only to provide a sense of pride in the past, or to engender respect for indigenous peoples, but also to enable people in indigenous mind sets to make a better transition into the world of science and technology,” said Prof Nel.

The guest speaker at the launch was Dr Otsile Ntsoane, acting Director of IKS at the Department of Science and Technology. In his speech Dr Ntsoane stressed the symbolic and concrete value of the publication. “The publication can have a great social impact and the research results can contribute to chancing the economic landscape of South Africa,” he said.

The publication can be purchased at R150 per copy. For more information, Ms Steffi Cawood, Programme Coordinator for Africa Studies at the UFS can be contacted at (051) 401-2614.

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

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