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20 August 2025
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Story Dr Annelize Oosthuizen
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Photo Supplied
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.
Law students triumph in Africa
2007-08-16
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Pictured with the trophies they have won are, from the left: Ms Qaqamba Vellem (fourth-year LL.B. student), Prof. Johan Henning (Dean of the UFS Faculty of Law), Prof. Loot Pretorius (Head of the Department of Constitutional Law and Philosophy of Law), Ms Lucy Nthotso (fourth-year LL.B. student), Ms Thapi Matsaneng (moot coach and lecturer in Corporate Law at the UFS) and Mr Johnny Modipa (third-year LL.B. student).
Photo: Stephen Collett
Law students triumph in Africa
A team of students from the Faculty of Law at the University of the Free State (UFS) has won the first prize at the 16th African Human Rights Moot Court Competition held in Senegal last week.
The UFS team consisted of three L.L .B. students, namely Ms Lucy Nthotso, Ms Qaqamba Vellem and Mr Johnny Modipa, and beat teams from numerous South African law faculties as well as from the rest of Africa.
The Moot Court Competition is an event where students from law faculties across Africa argue a hypothetical case on human rights issues pertinent to the continent. This year’s competition dealt with the issues of refugee status, nationality, HIV/AIDS and the right to education.
Over and above the UFS team’s success as the overall competition winners, the UFS team came first in the written memorials category (written substance of the argument of the particular party), beating seventy teams from both the English and French speaking African countries.
To further add to their splendid overall team performance, team members Ms Vellem and Ms Nthotso were selected amongst the top fifteen students for their oral arguments out of the hundred and forty who took part in the competition. Ms Vellem came tenth and Ms Ntshotso eleventh.
According to the Dean of the Faculty of Law at the UFS, Prof. Johan Henning, the faculty is extremely proud of this achievement of its students in such a highly regarded competition.
“This success shows that the quality of legal education and training we provide here at the UFS, both through the 4- and 5-year L.L.B. options is rated among the best in Africa, if not the world,” Prof. Henning said.
He said it also showed that the faculty is committed to producing black law graduates of substance who are second to none.
The three students were coached by Ms Thapi Matsaneng, a UFS law graduate who is completing her Ph.D. at the University of London and who was groomed by the UFS as part of its Grow Our Own Timber programme, aimed at producing black academics.
Prof. Loot Pretorius, head of the department of constitutional law and philosophy of law at the UFS, acted as a consultant to the team. Ms Matsaneng also accompanied the three team members to Senegal.
The panel of judges who determined the winners comprised of the commissioners of the African Commission on Human and Peoples’ Rights, a South African Constitutional Court judge as well as other respected members of the legal community.
Media Release
Issued by: Mangaliso Radebe
Assistant Director: Media Liaison
Tel: 051 401 2828
Cell: 078 460 3320
E-mail: radebemt.stg@ufs.ac.za
16 August 2007
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