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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

Prof Jonathan Jansen steps down as UFS Vice-Chancellor and Rector
2016-05-16

Statement by Prof Jonathan Jansen, Vice-Chancellor and Rector of the UFS (pdf)

Statement by Judge Ian van der Merwe, Chairperson: UFS Council

Prof Jonathan Jansen will step down as Vice-Chancellor and Rector of the University of the Free State (UFS) on 31 August 2016.

He will take up an invitation as a Fellow at the Center for Advanced Studies in the Behavioral Sciences at Stanford University in the USA in September 2016. The fellowship, which was awarded to him earlier this year, is an opportunity for him to further advance his career as an internationally renowned academic in education. Prof Jansen’s departure is a great loss for the university, but the Council accepts his decision to step down and pursue his academic career as well as other opportunities.

The Council is grateful for the vision and the inspirational leadership that Prof Jansen provided during his tenure at the UFS. He has led the university through difficult and complex times – from after the Reitz incident up until the recent student protest actions. He brought stability and respect for the university – nationally as well as internationally.

The Council appreciates Prof Jansen’s drive to further the academic performance and transformation of the UFS. To this end he was instrumental in the improvement of student success and graduation rates, the increase in the percentage of academic staff with doctoral qualifications, the increase in research outputs, the growth in staff diversity, and the growth in third-stream income.

Furthermore, Prof Jansen played a significant part in developing the UFS as a place where the embrace of diversity and the integration of the university provide a backdrop for academic excellence. Under his leadership, the UFS made great strides in fulfilling its social responsibility to serve the community. He was the right leader at the right time for the university.

On behalf of the Council and the entire university community, I thank him for his contributions as a capable, energetic and dedicated leader and wish him the best for his future.

Prof Jansen was appointed as Vice-Chancellor and Rector on 1 July 2009 and his term of office was extended for another five years by the Council on 1 July 2014. 

In the event that the position is not filled by the end of August 2016, Prof Nicky Morgan, current Vice-Rector: Operations at the UFS, will act as Vice-Chancellor and Rector. The Council will shortly start the process to appoint a successor through a national and international search.

Released by: Lacea Loader (Director: Communication and Brand Management)
Tel: +27(0)51 401 3422/2707 or +27(0)83 645 2454
Email: news@ufs.ac.za | loaderl@ufs.ac.za
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