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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 appoints Prof Francis Petersen as Vice-Chancellor and Rector

2016-12-02

Prof Francis Petersen

The Council of the University of the Free State (UFS) is pleased to announce that it has decided to appoint Prof Francis Petersen as Vice-Chancellor and Rector of the UFS.

Announcing the decision to appoint Prof Petersen today (Friday 2 December 2016) during the quarterly Council meeting on the Bloemfontein Campus, the Chairperson of the UFS Council, Judge Ian van der Merwe, said the university was fortunate to be able to appoint a candidate of such good quality to the position.

Prof Petersen, Deputy Vice-Chancellor: Institutional Innovation at the University of Cape Town (UCT), and Prof Lis Lange, Vice-Rector: Academic at the UFS, were in line for the position. The university’s Selection Committee expressed equal preference for both and the two candidates were therefore recommended to Council for the position.

“It has been a truly participatory and transparent selection process, which has assisted in the Council being able to make this decision. The higher-education sector has been through a difficult and challenging time during the past few months and the Council is thankful that a leader like Prof Petersen can head the university in 2017 and beyond,” said Judge Van der Merwe.

In his statement of intent, which was submitted earlier as part of the application for the post, Prof Petersen indicated that it is important to imagine the UFS’s location in South Africa and Africa, to realise the challenges within this context, now and in the future, so as to sharpen the university’s focus to become a more inclusive, academic excellent institution, embedded in a culture of innovation. “Therefore, the ideal of academic excellence must be supported by an institutional framework of diversity and inclusivity. The Academic Project should focus on a unique educational experience for every UFS student, the enhancement of student throughput-rate in academic programmes through dedicated academic support, graduate attributes, and curriculum change and renewal,” he said. He furthermore stated that research and innovation must focus on impact and international visibility. “It is thus not only the increase in research and innovation output, but the quality and impact thereof.”

Prof Petersen was previously the Dean of Engineering and the Built Environment at UCT. He brings to the position of Vice-Chancellor and Rector his extensive experience of management in both the industry and academic sectors. He has been the executive head of strategy at Anglo American Platinum and head of the Department of Chemical Engineering at the Cape Technikon (now Cape Peninsula University of Technology). He is a member of the UCT Council, non-executive director on the Board of Pragma Holdings, non-executive director on the Board of the Unlimited Group, and Chairman of the Board of Trustees of the Seedcap (Venture Capital) Trust. Among others, he previously served as member on the Board of the Council of Scientific and Industrial Research, the National Advisory Council on Innovation, and the Council of the Academy of Science of South Africa.

He graduated from Stellenbosch University with a BEng (Chem Eng), MEng (Metal Eng), and PhD (Eng) degrees and completed a short course on Financial Skills for Executive Management. He is a recipient of the Ernest Oppenheimer Memorial Trust Award for research excellence, and was visiting professor at the Cape Technikon and extraordinary professor in the Department of Chemical Engineering at Stellenbosch University. He is a regular reviewer of journals, and member of a range of editorial boards for international journals.

Prof Petersen is also a registered professional engineer with the Engineering Council of South Africa and a Fellow of both the South African Institute of Mining and Metallurgy, and the South African Academy of Engineers.

Prof Petersen succeeds Prof Jonathan Jansen, who stepped down as Vice-Chancellor and Rector of the UFS on 31 August 2016. An international executive search agency specialising in academic appointments has assisted the UFS Council in its search for top-quality candidates.

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

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