The Two-Pot Retirement System in South Africa: What It Means for Your Savings

What the two-pot system changed

Before 1 September 2024, members of pension funds, provident funds, and retirement annuities could generally only access their accumulated savings by resigning from their employer — a route that saw billions leave the retirement system prematurely. The two-pot system was introduced to address financial hardship without encouraging full withdrawal.

From 1 September 2024, every rand contributed to a qualifying retirement fund is split at the point of contribution: one third goes into the savings component, and two thirds go into the retirement component. This split applies to new contributions only — accumulated savings before the implementation date were seeded differently (a once-off seed from pre-existing funds went into the savings pot).

The savings component: what you can access before retirement

The savings component holds one third of every new contribution. You can make one withdrawal from it per tax year (March to February), with a minimum withdrawal of R2,000. There is no maximum, except that you cannot withdraw more than is in the savings component at the time of the request.

Withdrawals from the savings component are taxed as income in the tax year you take the money out. The amount withdrawn is added to your other income and taxed at your marginal rate — not at a flat rate or a special retirement lump-sum rate. This means a large withdrawal at a high-income year is taxed more heavily than the same withdrawal taken in a lower-income year.

The savings component is accessible without resigning from your employer. You apply through your fund administrator, who processes the request and deducts tax at source (PAYE) before paying out. The withdrawal is reported to SARS on your IRP5 for the tax year.

The retirement component: what stays locked until retirement

Two thirds of every new contribution goes into the retirement component, which cannot be accessed before retirement under any circumstances — not for financial hardship, not by resigning, not by emigrating under the current rules. It is intended to fund an annuity at retirement.

At retirement, the retirement component must be used to purchase an annuity (either a life annuity from an insurer, or a living annuity you manage yourself). Unlike the old rules for provident fund members, you can no longer take the retirement component as a lump sum — it must generate a regular income.

Vested rights protect savings accumulated before the two-pot implementation date. If you have pre-existing retirement savings, the rules that applied at the time you saved them largely still apply to those funds — the two-pot split only governs new contributions after 1 September 2024.

The seed capital that started your savings component

When the two-pot system launched, existing fund members didn't start with an empty savings component. A once-off seed — 10% of your vested retirement interest as at 31 August 2024, capped at R30,000 — was transferred from your pre-existing savings into the new savings component. This gave members an immediately accessible balance from day one of the new system.

The seed is separate from new contributions: it came from what you'd already saved, not from new money. For members who had large balances, the R30,000 cap meant only a fraction was seeded. For members with smaller balances, the full 10% may have been available.

Worked example: five years of contributions

Say you contribute R5,000 per month to a pension fund from September 2024. Of each R5,000 contribution, R1,667 goes to the savings component and R3,333 goes to the retirement component.

After one year (12 months), your savings component holds approximately R20,000 in contributions (ignoring growth for simplicity), plus whatever seed was transferred at inception. You are entitled to withdraw up to the full savings component balance — but a minimum of R2,000 — once in that tax year.

If you withdraw R15,000 from the savings component in that tax year and your marginal income tax rate is 26%, SARS will tax R15,000 at 26% = R3,900 in income tax. You receive R11,100 after tax. The savings component then continues to accumulate from your ongoing contributions — the withdrawal doesn't close the component or change the split.

After five years at R5,000/month, you've contributed R300,000 in total. R100,000 is in the savings component (before any withdrawals or growth) and R200,000 is in the retirement component (before growth). If you've made withdrawals along the way, the savings component balance is lower by those amounts plus the associated tax paid.

The cost of withdrawing early

Every rand withdrawn from the savings component before retirement is a rand that does not compound inside a tax-sheltered environment. Retirement funds grow without incurring annual income tax on the gains — a significant advantage over investing outside a retirement vehicle. When you withdraw early, you also lose the tax benefit on that capital for all the remaining years until your intended retirement.

The tax on withdrawal makes it more expensive still. If you're in a 31% or higher bracket, more than a third of every rand you withdraw goes to SARS. Contrast this with leaving the money inside the fund, where it grows tax-free and is taxed at retirement lump-sum rates, which have their own exemptions and stepped rates.

The savings component exists for genuine financial hardship — unexpected large expenses where the alternative would be taking out a high-interest personal loan. In those cases, accessing the savings component can make sense even with the tax cost. Using it as a routine supplement to monthly income is likely to meaningfully reduce the retirement income the fund can generate.

How the two-pot system applies across different fund types

The two-pot rules apply to pension funds, provident funds, and retirement annuities equally — but the practical process for making a savings component withdrawal differs slightly. Pension fund members typically request a withdrawal through their employer's HR or payroll process, since the fund administrator operates at the employer level. Retirement annuity holders deal directly with their RA provider. Processing times and required documentation vary; check with your specific administrator before planning around a specific withdrawal date.

Preservation funds — where you transferred a previous employer's retirement savings when changing jobs — are also subject to the two-pot rules for new contributions, but the pre-existing balance retains the old rules. A preservation fund member who transferred a large balance before September 2024 has a vested component governed by the prior regime, and any new contributions (if applicable) follow the two-pot split.

Retirement annuities owned by self-employed individuals or those supplementing an employer pension fund work identically to pension funds under the two-pot structure: one third of each new contribution goes to the savings component. The key practical difference is that RA contributions are tax-deductible in the year they are made, so the tax saving from contributing is immediate, while the tax cost of an early savings component withdrawal is deferred to the year of withdrawal.

If you belong to multiple funds simultaneously — a compulsory employer pension fund and a personal RA, for example — each fund operates its own savings and retirement components independently. You could make one withdrawal from each fund's savings component in a tax year, but the combined withdrawal amounts are added together as income for SARS purposes. Withdrawing from multiple funds in the same tax year may push you into a higher bracket than withdrawing from one fund at a time across different tax years.