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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 sets deadline for applications

2005-11-14

The University of the Free State (UFS) calls on all prospective students wishing to study at the UFS in 2006 to submit their applications for admission by no later than 30 November 2005.

“This applies to first-time entering first-year students, senior students who have interrupted their studies for at least one year and undergraduate students from other educational institutions,” said Mr Vernon Collett, Registrar: Academic Student Services at the UFS.

According to Mr Collett students whose applications for admission are received after 30 November 2005 and until 25 January 2006 will be accepted subject to the availability of place on the programme they applied for.

“After 30 November 2005 academic advice within a one-stop service may not be available to students and no conditional exemptions will be considered. No transfer students from other tertiary institutions will also be accepted after 30 November 2005,” said Mr Collett.

Prospective students who want to apply must pay a non-refundable fee of R110 into a designated account, which will be provided when the application form is sent to them. The signed application form must be accompanied by a certified copy of the prospective student’s identity document or passport and a proof of payment of the application fee. The application form of a minor must be signed by his/her parent or guardian and the field of study should be clearly indicated.

“A total of 25 251 students are registered at the UFS Main Campus this year. We expect a considerable number of applications and foresee that our numbers for next year will be similar to what it is now,” said Mr Collett.

First-time entering first-year students on the Main Campus will be welcomed by the Rector and Vice-Chancellor of the UFS, Prof Frederick Fourie, on 14 January 2006 at 11:00 in the Callie Human Centre.

The registration of first-time entering first-year students will commence on 17 January 2006 and that of senior students on 23 January 2006 at the Callie Human Centre according to a programme. Students who applied for admission after 30 November 2005 can register from 2 February 2006. Lectures will commence on 6 February 2006 and the registration process will end on 11 February 2006.

Prospective students who want to apply for admission or who have any enquiries can call (051) 401-3000 or visit the UFS web site at www.uovs.ac.za.

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

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