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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

King Moshoeshoe comes alive on national television

2004-11-02

Honourable Bethuel Pakalitha Mosisili, Prime Minister of Lesotho, and his wife; King Letsie III of Lesotho and Dr Ezekiel Moraka, Vice-Rector: Student Affairs at the UFS during the première of the film at the Royal Palace in Lesotho

The ground-breaking documentary film on the life and legacy of King Moshoeshoe, the founder of the Basotho nation, will come alive on Thursday 4 November 2004 when it is screened on SABC2 at 21:00

The film, called Moshoeshoe: The Renaissance King, forms part of a larger project by the University of the Free State (UFS) to honour the Moshoeshoe legacy of nation-building and reconciliation and to explore his role as a model of African leadership. It was produced by the well-known journalist Mr Max du Preez and commissioned by the UFS as part of its centenary celebrations.

The SABC2 screening was preceded by a première in Bloemfontein last month, and was attended by provincial political leaders.

This past weekend there was a première at the Royal Palace in Lesotho, which was attended by King Letsie III, the prime minister, the chief justice, judges, the president of the senate, cabinet ministers and directors-general.

“Through this documentary film the UFS commits itself to developing a shared appreciation of the history of this country and to the establishment of the Free State Province as a model of reconciliation and nation-building. King Moshoeshoe is also a strong common element, and binding factor, in the relationship between South Africa/the Free State, and its neighbour, Lesotho,” said Prof Frederick Fourie, Rector and Vice-Chancellor of the UFS.

“Not all people in South Africa know the history of Moshoeshoe. Many Basotho – but not all – are well versed in the history of Moshoeshoe, and his name is honoured in many a street, town and township. Many white people know little of him, or have a very constrained or even biased view of his role and legacy. In Africa and the world, he is much less known than, for instance, Shaka,” said Prof Fourie.

“King Moshoeshoe did a remarkable thing in forging a new nation out of a fragmented society. He also created a remarkable spirit of reconciliation and a remarkable spirit of leadership,” said Prof Fourie.

According to Prof Fourie we already benefit from his legacy: the people of the Free State share a tradition of moderation and reconciliation rather than one of aggression and domination. “For the UFS this is also part of real transformation – of creating a new unity amidst our diversity,” said Prof Fourie.

“We also find in the legacy of King Moshoeshoe the possibility of a “founding philosophy”, or “defining philosophy”, for the African renaissance. To develop this philosophy, we must gain a deeper understanding of what really happened there, of his role, of his leadership. Therefore the UFS will encourage and support further research into the history, politics and sociology of the Moshoeshoe period, including his leadership style,” said Prof Fourie.

Media release
Issued by: Lacea Loader
Media Representative
Tel: (051) 401-2584
Cell: 083 645 2454
E-mail: loaderl.stg@mail.uovs.ac.za
2 November 2004

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