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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

Help to rural women to become entrepreneurs

2006-10-24

Some of the guests who attended the ceremony were, from the left: Mr Donray Malabie (Head of the Alexander Forbes Community Trust), Ms Jemina Mokgosi (one of the ladies from Tabane Village who is participating in the Women in Agriculture project), Dr Limakatso Moorosi (Head: Veterinary Services, Free State Department of Agriculture), Prof Johan Greyling (Head: UFS Department of Animal and Wildlife and Grassland Sciences) and Ms Khoboso Lehloenya (coordinator of the project from UFS Department of Animal and Wildlife and Grassland Sciences). Photo: Leonie Bolleurs\

Alexander Forbes and UFS help rural women to become entrepreneurs

Today, the Alexander Forbes Community Trust and the University of the Free State (UFS) joined forces to create an enabling environment for rural women to become players in the private sector.

Three years ago the UFS set up a unique small-scale household egg production project called Women in Agriculture in Thaba ‘Nchu as a pilot project. The project was officially launched today by Mr Donray Malabie, Head of the Alexander Forbes Community Trust.

The aim of the Women in Agriculture Project is to create jobs, provide food security and to help develop rural women into entrepreneurs. A total of 25 women based in Tabane Village in Thaba ‘Nchu are the beneficiaries of the project.

“This is the first project in the Free State the Alexander Forbes Community Trust is involved with. The project would help rural women acquire the skills they need to run their own egg-production business from their homes,” said Mr Malabie.

“The ongoing debate on the shortage of skills ignores the fact that people with little or no education at all also need training. This project is special to the Trust as it provides for the creation of sustainable jobs, food security and the transfer of much needed skills all at once, particularly at this level,” he said.

Every woman in the group started with two small mobile cages that housed 12 hens each. The units are low in cost, and made of commercially available welded mesh and a metal frame. Now, each woman has four cages with 48 hens. The group manages to collectively produce 750 eggs daily.

The eggs are currently sold to local businesses, including spaza shops and the women are using the income generated to look after their families and to further develop their business.

The Department of Animal and Wildlife and Grassland Sciences at the UFS identified the project and did the initial research into the feasibility of setting up such a project.

“A demonstration and training unit has been established at the Lengau Agricultural Development Centre and the women attended a short practical training course. Subsidies are provided for feeding, together with all the material and the lay hens necessary for the start of the business,” said Ms Khoboso Lehloenya, coordinator of the project from the Department of Animal and Wildlife and Grassland Sciences at the UFS.

“The advantage in using lay hens is that they are resistant to diseases and the women will not need electric heating systems for the egg production,” said Ms Lehloenya.

According to Ms Lehloenya, the women are already benefiting from their egg production businesses. “Some of them have used the profit to buy school uniforms and tracksuits for their children and others are now able to make a monthly contribution to their household expenses,” said Ms Lehloenya.
“In South Africa, possibly due to cultural reasons and circumstances, most black people prefer to eat older and tougher chickens, compared to younger soft commercially available broiler chickens. This preference creates a further advantage for the women. At the end of their production cycle, old hens can be sold for a higher price than point-of-lay or young hens. This brings in further money to pay for more hens,” said Ms Lehloenya.

The Alexander Forbes Trust contributed R191 000 towards the project aimed at expanding it to benefit 15 more women.

“We are in the process of recruiting an additional 15 women in Thaba ‘Nchu who will be trained by the Lengau Agricultural Development Centre in order to replicate the model and extend its reach”, said Ms Lehloenya.

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

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