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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 honours young researchers

2006-02-10

Some of the guests attending the recognition function were from the left: Prof Magda Fourie (Vice-Rector: Academic Planning at the UFS), Mr Joseph Smiles (lecturer at the UFS Department of Political Science and Thuthuka grant holder), Prof Frans Swanepoel (Director: Research Development at the UFS) and Dr Carlien Pohl (lecturer at the UFS Department of Microbial, Biochemical and Food Biotechnology and Thuthuka grant holder).
Photo: Leonie Bolleurs

The guest speaker was Prof Jonathan Jansen, Dean: Faculty of Education at the University of Pretoria (UP). He gave tips to young and promising researchers on how to be an outstanding scholar.
What is a Scholar

UFS honours young researchers

The University of the Free State (UFS) last night honoured 24 young researchers who are taking part in the National Research Fund’s (NRF) Thuthuka programme.

The recognition function is the first of its kind at the UFS. “The renewed focus on research development that was recently announced at the official opening of the UFS by the Rector and Vice-Chancellor, Prof Frederick Fourie, is an indication of the institution’s endeavour to create an environment in which research can be improved and flourish. This can only be obtained when researchers are being valued and that is why it is important to honour our young researchers,” said Mrs Annelize Venter, researcher at the UFS Research Development Directorate and coordinator of the programme.

The focus on research was also touched on recently by President Thabo Mbeki during the opening of Parliament when he said: “We will continue to engage the leadership of our tertiary institutions focused on working with them to meet the nation’s expectations with regard to teaching and research. For its part, the government is determined to increase the resource allocation for research and development and innovation, and increase the pool of young researchers."

According to Mrs Venter, research done in 2004 shows that the majority researchers who publish are white males above the age of 50. “Many students who undertake magister studies choose not to conduct research, but rather to do a thesis and additional subjects. This means that research is not stimulated. Students also find it difficult to obtain financial support for postgraduate studies,” she explained.
“Thutuka is a capacity building programme of the NRF that is aimed to
fund and support the qualifications of women and young black scientists and other researchers who do not have a rating for postgraduate research. It is based on a funding partnership between the UFS and the NRF,” said Mrs Venter.

Last night Prof Frans Swanepoel, Director: Research Development at the UFS, added to his by saying: “With the Thuthuka programme we aim to create and sustain a research culture at the UFS, promote international research and train researchers of a high quality and enhance the research capacity at the UFS by focusing on women, black researchers and other promising researchers.”

The programme was started by the NRF in 2001. At that stage only 17 grants were made countrywide. Last year 370 postgraduate students took part in the programme.

According to Mrs Venter the programme was implemented at the UFS in 2003. “At that stage we only had 5 grant holders. This year there are 24 Ph D and magister students on the programme,” she said.

A couple of young promising researchers, who will be participating in the programme in 2007, also attended last night’s recognition function.

The guest speaker was Prof Jonathan Jansen, Dean: Faculty of Education at the University of Pretoria (UP). He gave tips to young and promising researchers on how to be an outstanding scholar.

Nine professors were also congratulated with their promotion to senior research professor, namely Proff Louise Cilliers (Department of English and Classical Languages), James du Preez (Department of Microbial, Biochemical and Food Biotechnology), Johan Grobbelaar (Department of Plant Sciences), Dingie Janse van Rensburg (Centre for Health Systems Research and Development), Dap Louw (Department of Psychology), Philip Nel (Department of Afro-asiatic Studies and Language Practice and Sign Language), Louis Scott (Department of Plant Sciences), Dirk van den Berg (Department of History of Art) and Andries Raath (Department of Constitutional Law and Philosophy of Law).

Media release
Issued by: Lacea Loader
Media Representative
Tel: (051) 401-2584
Cell: 083 645 2454
E-mail: loaderl.stg@mail.uovs.ac.za
10 February 2006

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