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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

Student receives international award in microbiology

2008-01-24

A postgraduate student at the University of the Free State (UFS) received an exceptional honour last month when he received the first prize for his presentation in the Biochemistry and Industrial Mycology session of the Asian Mycology Congress (AMC) held in Malaysia.

Desmond Ncango (24), a Ph.D. student from the Department of Microbial, Biochemical and Food Biotechnology received the first prize for his presentation on the inhibitory effects of non-steroidal anti inflammatory drugs (NSAIDs) such as aspirin on fungi.

This suggests that commonly used aspirin may be used as a cheap antifungal to combat yeast infections. Desmond also exposed novel lubricants that are used by yeasts for water-propelled movement. This may find application in nanotechnology in the lubrication of nanorobots, which are manmade miniature machines, invisible to the naked eye, which may in future be used to combat diseases such as cancer.

The conference, which was attended by more than 300 representatives from 27 countries, is a platform for mycologists (who are experts in fungi) around the world to come together and share their knowledge and research. “Many interested researchers listened to my presentation and were impressed by the novelty and scientific depth of my work,” said Desmond.

“The presentation was selected as the best because of its novelty, academic depth as well as applicability. The meticulous preparation and presentation style also contributed to the success,” said Prof. Lodewyk Kock, head of the Lipid Biotechnology Group at the department and main promoter of Desmond’s Ph.D. studies.

“I cannot really explain the feeling when my presentation was selected as the best as it was presented in a very difficult category and many senior researchers and professors also participated. I plan to use all the knowledge and skills I have learnt from Prof. Kock, who is my role model, especially to the benefit of disadvantage communities in South Africa. I want to follow an academic career at a tertiary institution when I have completed my Ph.D. studies,” said Desmond.

Desmond went to school in Botshabelo, Bloemfontein and completed his Grade 12 in 2000 with a distinction in Mathematics. He enrolled for a B.Sc. degree at the UFS, majoring in Microbiology and Physiology. After obtaining this qualification, he joined the postgraduate research group of Prof. Kock. He completed his M.Sc. degree with distinction last year and was privileged to have this research published in and on the cover of the Canadian Journal of Microbiology, a journal accredited by the Institute for Scientific Information (ISI).

He was one of six postgraduate students from the Lipid Biotechnology Group who attended the AMC conference in Malaysia. The students’ attendance was funded by the South African Fryer Oil Initiative (SAFOI), which is housed in the UFS Department of Microbial, Biochemical and Food Biotechnology. This initiative, steered by Prof. Kock, currently monitors edible oils in the food industry in South Africa and makes a quality seal available to the manufacturers and distributors of these edible oils.

“SAFOI’s income is used to fund my own research on various kinds of oils (including yeast oils) to enable postgraduate students to attend international congresses and to partially fund international scientific symposia and congresses,” said Prof. Kock.

Media Release
Issued by: Lacea Loader
Assistant Director: Media Liaison
Tel: 051 401 2584
Cell: 083 645 2454
E-mail: loaderl.stg@ufs.ac.za
24 January 2008

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