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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

Statement: Visit of the Portfolio Committee on Education to the UFS

2005-02-25

The chair of the Portfolio Committee on Education (PCE) Prof Shepherd Mayatula has commended the management of the University of the Free State (UFS) for its positive approach to the incorporation of the Vista and Qwaqwa campuses.

According to a statement issued by the university’s communication section, Prof Mayatula said that while there were outstanding issues to address, a platform had been created through the visit of the portfolio committee for the UFS to find solutions.

Speaking at the end of a visit to the Bloemfontein campus of the UFS, Prof Mayatula said: “You know the issues that exist between the three campuses and you know the solutions. You don’t need recommendations from the Committee.”

Earlier today the PCE held a three-way meeting between the PCE, the management of the UFS and the Vista Task Team, representing staff and students at the Bloemfontein campus of the former Vista University .

The Bloemfontein campus of the former Vista University was incorporated into the UFS in January 2004.

The multi-party delegation from the PCE was led by its chairperson, Prof S Mayatula, while the delegation from the UFS was led by the Rector and Vice-Chancellor, Prof Frederick Fourie, while the Vista Task Team was lead by Mr Paseka Mokoena.

Following a presentation by the Vista Task Team and a presentation by the UFS management, other committee members also commended the UFS for the spirit in which outstanding issues were being handled.

It was indicated by portfolio committee members that other universities have far more serious problems than the UFS, and that some of these universities have also been visited by the PCE. The UFS appears to be on the road to be an important pilot case for incorporations and mergers.

The issues that were discussed during today’s meeting included the following:

outstanding issues in the process of incorporating the Bloemfontein campus of the former Vista University into the UFS, including:
staff issues and conditions of service
issues of student aid and pipeline students
governance of the UFS
the long term utilisation of Vista as a site

The Rector and Vice-chancellor of the UFS, Prof Fourie, expressed his appreciation for the role played by the Portfolio Committee on Education in bringing about a common understanding of the transformation issues facing the UFS.

Prof Fourie said the Portfolio Committee’s visit was a useful intervention to bring about a sense of urgency in resolving matters affecting the Vista campus as well as the Qwaqwa campus.

Issued by: Mr Anton Fisher
Director: Strategic Communication
Cell: 072-207-8334
Tel: 051-401-2749
25 February 2005

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