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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

State of our campuses: Impact of non-completion of the 2016 academic year on UFS students

2016-10-08

Dear Parents/Guardians and Students,

Impact of non-completion of the 2016 academic year

The University of the Free State (UFS) reiterates its support and commitment to the cause of free higher education. We have stated our position in all the available spaces. We want to work with UFS students to put pressure on the government to commit itself to accept the many suggestions put forward to make free education possible within a negotiated timeframe.

We are also seriously committed to our responsibility of providing education to all students enrolled at the university. We are doing our outmost to ensure that we can resume academic activities next week.

Description: " Academic non-completion 2016 Tags: " Academic non-completion 2016

We want to bring to your attention what will happen to individual students if the UFS cannot resume classes fully on Monday 10 October 2016.

Currently we have extended the academic year by one week. Some faculties are working on Saturdays and Sundays, starting earlier and finishing later to complete the material that needs to be taught and the practical work that students need to do to be able to write exams.

In the three biggest faculties at the university: Education, the Humanities, and Natural Sciences, this is what will happen:

Education will fail to graduate 1 193 students
Humanities will fail to graduate 1 125 students
Natural and Agricultural Sciences will fail to graduate 1 390 students

In the professional faculties: Economic and Management Sciences, Health Sciences, and Law, this will happen:

Economic and Management Sciences will fail to graduate 997 students
Health Sciences will fail to graduate 633 students
Law will fail to graduate 619 students

In total, approximately 6 000 students will not receive complete transcripts of their degrees and the certificates for their qualifications.

The university currently has 3 238 students on NSFAS bursaries. None of these students will be able to apply for bursaries for the lost year. They will be regarded as having failed or not completed their courses. They will not only miss this year, but the opportunity of studying in the future.

These students come from families to which their success in higher education was supposed to mean a change in the future of the entire family. Some parents/guardians hold more than one job to be able to pay tuition fees.

In not allowing the year to continue and students to finish, we are throwing away the efforts that entire families of poor people have made for four or five years to put their children through university. The promise of free education for future generations means nothing to these families who are poor in the present.

In terms of the academic calendar, it is a false argument to say that universities will be able to enrol first-years, because what 2016 students will miss, is the second semester.

We do not have the capacity to teach double the number of students in the second semester. This also misses the point that those students who were completing modules in order to graduate, will waste an entire year (assuming they have funding) to complete their degrees. This argument does not see the knock-on effect that students, not promoting in modules from first to second and second to third year, etc., will have. Finally, this also misses the point of what will happen to students who have to repeat first-semester modules.

In terms of academic staff, students are discounting the willingness of academic staff to teach double or to have the academic year extended by approximately six weeks between teaching and examinations. The same can be said for all the administrative and support staff required for running the university.

In our case, all the students in the University Preparation Programme (UPP) on the South Campus in Bloemfontein will be stuck without being able to move into mainstream modules, preventing a new intake of UPP students for 2017. These are the poorest and most disadvantaged students at the UFS.

It is absolutely necessary to find a means of protest and political action that will not jeopardise the future of current students and the country’s desperate need for critical skills. The interdict against violent protest secured by the UFS is still in force. The police will intervene if the interdict is not respected and the UFS will have no control over police actions.

We trust that parents/guardians and students understand the implications of the situation.

Kind regards,

Prof Nicky Morgan
Acting Rector
University of the Free State

Released by:
Lacea Loader (Director: Communication and Brand Management)
Telephone: +27 51 401 2584 | +27 83 645 2454
Email: news@ufs.ac.za | loaderl@ufs.ac.za
Fax: +27 51 444 6393

State of our campuses #11: Academic activities on UFS campuses continue

State of our campuses #10: Impact of non-completion of the 2016 academic year on UFS students

State of our campuses #9: Academic programme on all UFS campuses to resume on Monday 10 October 2016

State of our campuses #8: UFS extends vacation as from 28 September until 7 October 2016, 28 September 2016

State of our campuses #7: All three UFS campuses will be closed today, 27 September 2016.

State of our campuses #6: All UFS campuses reopen on Tuesday 27 September 2016

State of our campuses #5: UFS campuses to remain closed on Monday 26 September 2016

State of our campuses #4: Decisions about the UFS academic calendar

State of our campuses #3: UFS campuses closed until Friday 23 September 2016

State of our campuses #2: UFS Bloemfontein and South Campuses closed on Tuesday 20 September 2016 (19 September 2016)

State of our campuses #1: Academic activities suspended on UFS Bloemfontein Campus (19 September 2016)

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