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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 and Mexico forge links

2006-03-30

Some of the guests attending the signing of the memorandum of agreement were in front from the left Prof Wijnand Swart (Chairperson: Centre for Plant Health Management at the UFS), His Excellency Mauricio de Maria y Campos (Ambassador of Mexico in Southern Africa), Prof Magda Fourie (Vice-Rector: Academic Planning at the UFS) and Dr José Sergio Barrales Domínguez (Rector of the University of Chapingo in Mexico).
Photo: Stephen Collett

UFS and Mexico forge links
The Centre for Plant Health Management (CePHMa) in the Department of Plant Sciences at the University of the Free State (UFS) is presenting its first international conference. The conference started yesterday and will run until tomorrow (Friday 31 March 2006) on the Main Campus in Bloemfontein.

The conference is the first on cactus pear (or prickly pear) in South Africa since 1995. It coincides with 2006 being declared as International Year of Deserts and Desertification by the United Nations General Assembly.

During the opening session of the conference yesterday a memorandum of understanding (MOU) was signed between CePHMa and the University of Chapingo (Universidad Autonoma Chapingo) in Mexico. The signing ceremony was attended by the Ambassador of Mexico in Southern Africa, His Excellency Mauricio de Maria y Campos, the Rector of the University of Chapingo, Dr José Sergio Barrales Domínguez, and the Vice-Rector: Academic Planning of the UFS, Prof Magda Fourie, amongst other important dignitaries.

“South Africa and Mexico have a lot in common where agricultural practices in semi-arid areas and the role of the cactus pear are concerned,” said Prof Wijnand Swart, Chairperson of CePHMa at the opening of the conference.

He said that the MOU is the result of negotiations between CePHMa and the Ambassador of Mexico in Southern Africa over the past 12 months.

“The MOU facilitates the negotiation of international cooperative academic initiatives between the two institutions. This entails the exchange of students and staff members of the UFS, curriculum development, research and community service,” said Prof Swart.

“During the next two days, various areas of interest will be discussed. This includes perspectives from commercial cactus pear farmers in South Africa, the health management of cactus pear orchards, selection of new cultivars of cactus pear, and the nutritional and medicinal value of the crop,” said Prof Swart.

In his welcoming message Prof Swart explained that in recent years there has been increased interest in the cactus pear for the important role it can play in sustainable agricultural systems in marginal areas of the world. These plants have developed phenological and physiological adaptations to sustain their development in adverse environments.

“The cactus pear can serve as a life saving crop to both humans and animals living in marginal regions by providing a highly digestible source of energy, water, minerals and protein,” said Prof Swart.

“In an age when global warming and its negative impact on earth’s climate has become an everyday subject of discussion, the exploitation of salt and drought tolerant crops will undoubtedly have many socio-economic benefits to communities inhabiting semi-arid regions,” said Prof Swart.

“Plantations of cactus pear grown for fruit, forage and vegetable production, as well as for natural red dye produced from the cactus scale insect known as cochineal have, over the last two decades, been established in many countries in South America, Europe, Asia and Africa. The crop and its products have not only become important in international markets, but also in local markets across the globe,” said Prof Swart.

Detailed discussions on the implementation of the MOU will take place between CePHMa and the University of Chapingo after the conference.

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

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