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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

Four modernised controlled environment cabinets inaugurated

2006-07-27

Photographed in a controlled environment cabinet were at the back from the left: Mr Adriaan Hugo (head of the UFS Electronics and Mechanisation Division), Prof Herman van Schalkwyk (Dean: Faculty of Natural and Agricultural Sciences at the UFS) and Prof Koos Terblans (lecturer at the UFS Department of Physics). In front is Mr Koos Uys (engineering consultant from Experto Designa who helped with the cooling systems of the cabinets).
Photo: Leonie Bolleurs

Different look for research in controlled circumstances at the UFS

Research in controlled circumstances at the University of the Free State (UFS) turned a new page today with the inauguration of four modernised controlled environment cabinets of the Department of Soil, Crop and Climate Sciences.

“The controlled environment cabinets, which are situated next to the glass houses on the eastern side of the Agriculture Building on the Main Campus in Bloemfontein, were installed in the early 1980’s. The cabinets, used for research purposes in controlled circumstances by the UFS for many years, became dysfunctional and needed to be repaired and put into use again,” said Prof Herman van Schalkwyk, Dean: Faculty of Natural and Agricultural Sciences at the UFS.

“The cabinets are used by the agronomics, horticulture and soil science divisions of the Department of Soil, Crop and Climate Sciences to control factors such as the temperature, the intensity and quality of light, synthesis and humidity. This is done 24 hours a day, with hourly intervals,” said Prof Van Schalkwyk.

The cabinets are ideally suited to determine the joint and separate effects of these factors on the growth of plants. The adaptability of plants to climate can also be investigated under controlled circumstances. All of this leads to a better understanding of the growth and development process of plants, more specifically that of agricultural crops.

“The effect of these environmental factors on the effectiveness of insect killers such as fungus killers, insecticide and weed killers can also be investigated and can help to explain the damage that is sometimes experienced, or even prevent the damage if the research is timeously,” said Prof Van Schalkwyk.

A new cabinet can cost between R2-3 million, depending on the degree of sophistication. “Although controlled environment cabinets have been used for agricultural research for a long time, it has become costly to maintain them and even more impossible to purchase new ones,” said Prof Van Schalkwyk.

According to Prof Van Schalkwyk the cabinets were re-built by die UFS Electronics and Mechanisation Division. Some of the mechanisms were also replaced and computerised.

“The re-building and mechanisation of the cabinets were funded by the faculty and because the work was done by our own staff, an amount of about R1 million was saved. The maintenance costs will now be lower as the cabinets are specifically tailor made for our research needs,” said Prof Van Schalkwyk.

Where all monitoring was done manually in the past, the cabinets can now be controlled with a computer. This programme was designed by Prof Koos Terblans from the UFS Department of Physics.

According to Prof Van Schalkwyk the modernisation of the cabinets is part of the faculty’s larger strategy to get its instruments and apparatus up to world standards. “With this project we have proved that we can find a solution for a problem ourselves and that there are ways to get old apparatus functional again,” said Prof Van Schalkwyk.

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

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