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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 congratulates Wayde van Niekerk and other students for their national and international accomplishments

2015-09-17

Kovsies showing the world that success is inevitable
Photo: Johan Roux

Students from the University of the Free State (UFS) have not only conquered South Africa (SA), they have also left footprints in the world. During 2014 and 2015, our students have performed well in various fields.

A special celebratory event was held at the Bloemfontein Campus on Tuesday 15 September 2015. Members of the Rectorate, Student Representative Council (SRC), Grey College Secondary School personnel and former principal, Mr Johan Volsteedt, as well as UFS staff members and students gathered at the Callie Human Centre to congratulate those students who have recently represented the university with excellence atnational and global levels. Also present were representatives from the Department of Sports Arts Culture and Recreation (SACR) in the Free State and the Free State Sport Confederation (FSSC).

Sports leadership has proven to be one of Kovsies’ areas of expertise. From Wayde van Niekerk making international headlines as the 2015 Men’s 400m World Sprint Champion, to Nicole Walraven who was named as the SA under-21 Hockey 2015 Player of the Year, speaks the language of winners.

Wayde believes that his achievements are also for his family, friends, mentors, and the university community to rejoice in.“What I achieved is our achievement,” he said “the person I am today is because of the people around me.” Also supporting him at this event was MsAns Botha, his coach together with his family and friends.

Andricia Hinckemann’s commitment to promote environmental sustainability in light of the global warming crisis earned her the Miss Earth SA 2015 second princess status.

The UFS Debating Society also joined the ranks as highfliers when announced as South African National Universities Debating Champions for 2015. The UFS team competed in nine preliminary rounds. Devon Watson and NkahisengRalepeli from the UFS had to fight their way through nine preliminary rounds to the finals. Competing in the category English as a First Language, Devon and Nkahiseng brought yet another championship title home.

Success is music to our ears here at Kovsies, Veritas and Marjolein showed us that music can also symbolize success. These residence serenade groups took first and second place, respectively, at the 2015 ATKV National University Sêr competition.

Other students who have the world in their hands and are striving to make it a better place include Rolene Strauss (Miss World 2015), Elzane van der Berg (Deaf Miss South Africa 2014), the Shimlas (2015 Varsity Cup champions),KovsieNetball (2014 Varsity Netball champions and winners of 2014 National Premier League), KovsieTennis (2014 USSA Champions) and Varsity Sevens Champions 2015.

Prof Jonathan Jansen, Vice-Chancellor and Rector of the university remarked upon the inevitable nature of success amongst our university’s students. “Whether they are in athletics, netball, or debating, Kovsie students do well in every aspect of their lives.”

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