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20 August 2025 | Story Dr Annelize Oosthuizen | Photo Supplied
AnnelizeOosthuizen
Dr Annelize Oosthuizen, Subject Head of Taxation in the School of Accountancy, University of the Free State.

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

NRF commits R30-million for research at the UFS
2007-02-20

The National Research Foundation (NRF) has committed approximately R30-million for various research projects at the University of the Free State (UFS).
 
According to Prof Frans Swanepoel, Director of Research Development at the UFS, the NRF has also approved all eight research niche areas that were submitted to the NRF, the highest number approved at any university in the country.
 
Prof Swanepoel said the 24 research projects for which funding had been obtained from the NRF ranged from traditional healing and HIV/Aids/tuberculosis management, practices of the paediatric anti-retroviral programme at the UFS to nano-materials synthesis and characterisation.
 
He said the eight research niche areas were part of an initiative at the UFS to establish strategic clusters of academic and research excellence.
 
“There will be six strategic academic clusters at the UFS and the eight NRF-approved research niche areas will form part of them,” Prof Swanepoel said.
 
The six strategic clusters are:
1.         Water management in water-scarce areas
2.         New frontiers in poverty reduction and sustainable development
3.         Social transformation in diverse societies
4.         Ecologically sound value chains for agricultural commodities
5.         Materials and nano sciences
6.         Advanced bio-molecular research
 
Prof Swanepoel said that the UFS had also submitted five proposals in terms of an NRF initiative to establish research chairs at South African universities.
 
“Linked to our intention to establish six strategic academic clusters, five proposals for the South African Research Chair Initiative (SARCHi) were submitted. All five pre-proposals were accepted in the first round of screening, and successful candidates have been invited to submit full proposals by the end of February,” he said.
 
The proposed research chairs are:
 
Petro- and organometallic chemistry
Biocatalytic and biomimetic oxidation-reduction systems
Nano-solid state lighting
People’s health and well-being
Water management
 
Speaking at the official opening of the university earlier this month, the Rector and Vice-Chancellor of the UFS, Prof Frederick Fourie, said: “The cluster initiative represents a strategic initiative to focus our energies in a few key areas, investing in them so that the UFS can become an international leader in those fields.”
 
“A medium sized university such as the UFS with relatively limited human, physical and financial resources has to achieve this kind of ‘critical mass’ and synergy to establish itself in terms of its core functions of teaching/learning, research and community engagement,” said Prof Fourie.
 
Media release
Issued by: Lacea Loader
Media Representative
Tel: 051 401 2584
Cell: 083 645 2454
20 February 2007

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