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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

Triumph in the face of adversity
2016-04-29

Description: Glory NSH Tags: Glory NSH

Glory, one of fourteen NSH bursary recipients during the UFS Autumn Graduations.

At the University of the Free State (UFS) Autumn Graduation Ceremony held from 12-15 April 2016, on the Bloemfontein Campus, a record number of fourteen beneficiaries of the No Student Hungry (NSH) Bursary Programme received their degrees. This is an achievement they all feel they could not have reached, were it not for the support by NSH.

The NSH food bursary is awarded to students on the basis of financial need, academic excellence, and a commitment to serve the community. The UFS has helped over 650 students since 2011, when Prof Jonathan Jansen, Vice-Chancellor and Rector, started NSH.

These students are true beacons of inspiration and determination. Indeed, they have triumphed in the face of adversity. This is what can be said about their determination and will to succeed.

Glory, a previous recipient of the NSH bursary and a mother of two, graduated on Tuesday morning, receiving a BEd degree (intermediate phase). She stated that the NSH bursary changed her life drastically when she started receiving it.

“I used to constantly worry about my children and what they would eat. So I would sacrifice my own meals throughout the day just to make sure they have food to eat,” says Glory.

“The NSH bursary really gave me peace of mind, my school work was suffering and once I started receiving food each day, I could focus on what really mattered: my degree.”

“My goals for this year are to get a permanent job, and start receiving a stable salary. I am currently working as a temporary teacher at a primary school in Bloemfontein.

Description: Katlego NSH Tags: Katlego NSH

Katlego, one of fourteen NSH bursary recipients during the UFS Autumn Graduations.

“I never would have thought that I could have made it this far. I want to pursue my postgraduate studies, to inspire my children and other students who have been in my shoes. There is help and hope. My faith also gave me refuge. Nothing that is given to me is taken for granted,” says Glory.

Another student Katlego, who graduated on 14 April 2016, receiving her BCom Human Resource Management degree. At present, she is busy with her BCom Industrial Psychology Honours. She heard about the NSH food bursary, through a friend in 2014, and has been immensely grateful for all she has received. 

“There is no shame in asking for help. There can only be hope and relief,” she said.

“I am so thankful for NSH. As part of the bursary programme, we commit to serving the community. We receive but we are also encouraged to give back. The community service projects have helped me to get out of my comfort zone, to look beyond myself and acknowledge that I am also required to give back my time to others who appreciate and cherish it.”   

The NSH students are offered not only a food bursary; they participate in student wellness and development programmes, and they are motivated and exposed to opportunities for personal growth. Students are also encouraged to be involved in university or community projects as a way of ploughing back into the community, thus creating a reciprocal cycle of giving and receiving within their community.

 

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