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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

Two Kovsies in Baby Boks group for U20 Championship

2017-05-12

Scrumhalf Rewan Kruger, left, and prop Kwenzo Blose, both
rugby players from the University of the Free State, will
soon be playing in their first and second Junior World
Tournament respectively.
Photo: SA Rugby

Although he will soon be playing in his first Junior World Cup, Rewan Kruger believes his experience of international rugby will help him succeed. Last year, the scrumhalf was part of the South African schools team playing in the U19 series against Italy, Wales, England, and France.
Kruger and prop Kwenzo Blose, who will be playing in his second World Tournament, are two players from the University of the Free State that were recently included in the final Baby Boks group of 28. The World Rugby U20 Championship will take place in Tbilisi, Georgia from 31 May to 18 June.

A taste of international rugby

The 19-year-old Kruger says it is hard to describe how thrilled he is about his inclusion. “The whole group of players were gathered in a room and the next moment the coach [Chean Roux] played a video on his computer, announcing the team that will be playing abroad.”
The former Grey College, Bloemfontein, pupil has already had a taste of international rugby. “I believe the experience I gained in the international U19 series will help me a lot in the upcoming U20 World Rugby Championship. I already have an idea of the pace of an international game.”

Team can improve on previous year

Blose, KovsieSport’s Junior Sportsman for 2016, says the South African U20 team could do better than the fourth place they got in Manchester, England in 2016. “South Africa is a strong rugby nation and we have set high standards for ourselves. Therefore, we will do our best to win the tournament. We have a great group and I believe we have the potential to win the trophy.”
The former lock from Glenwood High School, Durban, says it has helped his team to play practice matches against senior teams such as the Griquas. “The preparation was tough and I think it will benefit the team.”

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