South Africa rolled out the Two-Pot Retirement System on 1 September, 2024. It applies to any South African who has a pension fund, provident fund or retirement annuity fund.

The Two-Pot Retirement System allows you to access a limited portion of your retirement savings before retirement for emergencies, while the majority of your savings remains "preserved". This means the larger part of your savings must stay invested until you reach retirement.

The goal of South Africa's new two-pot retirement savings system is to encourage the preservation of retirement fund investments until members retire, while also providing access to a portion of their accumulated savings during their working years.

Let’s look at each pot in more detail

Vested Pot (i.e. funds up to 31 August 2024)
Your Vested Pot comprises your retirement savings up to 31 August 2024. There will be a once-off compulsory transfer of 10% of your retirement savings on 31 August 2024 (capped at R30 000) to the Savings Pot. This initial transfer is commonly referred to as ‘seed capital’.

The rest of your retirement savings up to 31 August 2024 will remain in your Vested Pot. The Vested Pot is subject to the old rules for retirement funds and the new two-pot rules won’t apply to it. Click here for a recap of the old rules.

Savings Pot (1/3 from 1 September 2024)
This pot will hold your ‘seed capital’ and one-third of your retirement contributions, which will automatically go into this pot starting from 1 September 2024. You can access this pot before retirement if you need it. This aims to provide more flexibility for short-term financial
needs. You can draw a minimum of R2 000 from this pot once per tax year (i.e. between 1 March and 28 February), with no maximum limit.

Retirement Pot (2/3 from 1 September 2024)
The remaining two-thirds of your retirement contributions will automatically be allocated to this pot. This money is meant to be used when you retire. You cannot access this pot until you reach at least 55 years of age, except under specific conditions. Although known as the ‘Two Pot system’, it’s sometimes also described as a Three-Pot system due to the fact that, in reality, there are actually three separate retirement pots.

Savings Pot and Retirement Pot.

Tax Implications: Withdrawing from your Savings Pot

Tax Directive

When you withdraw money, the fund administrator will need to apply to SARS for a Tax Directive on your behalf which will reflect how much tax must be deducted before your funds are paid to you.

SARS will issue a Tax Directive if you:

• Are registered for tax and have a valid tax number and,
• Are up to date with your tax returns

SARS won’t issue the Tax Directive until both of the above apply. This means if you have outstanding tax returns, you won’ t be able to access your retirement Savings Pot until these old tax returns are filed.

Tax Debt

If you owe SARS any money, this tax debt will be deducted from your two-pot withdrawal and paid to SARS.

Marginal Tax Rate

When you take money out of the Savings Pot, it is treated as income. This means it is taxed according to your personal income tax rate, just like your salary. If you withdraw a large sum, it might push you into a higher tax bracket, which means you'll pay a higher percentage in
taxes on that amount.

For example, if you normally earn R370 000 per year and withdraw R50 000 from your Savings Pot, your total income for the year becomes R420 000. This will move you from the 26% tax bracket to 31% tax bracket, resulting in a higher tax rate on part of your income.

Let’s look at an example:

Anna earns R380 000 in the 2025 tax year. She withdraws R25 000 from her Saving Pot.
The fund administrator’s fee are R500. SARS instructs the fund that she has R2 000 tax debt due.

• Her total annual earnings: R380 000 + R25 000 = R405 000
• Her marginal rate of tax: 31%
• Tax on two-pot withdrawal: 31% * R25 000 = R7 750
• Net amount paid to Anna: R25 000 – R7 750 – R500 – R2 000 = R14 750
  
  

Pros

• Immediate access: you can draw money from this pot once per tax year, such as for emergencies or unexpected expenses.
• Flexibility: offers more control over your short-term financial needs.

Cons

• High taxes: large withdrawals will lead to higher taxes, which means you will end up paying more than you expected.
• Risk of spending too soon: easy access might lead to spending the money before retirement, reducing your savings for the future.
• Reduces liquidity at retirement: when you retire, the only cash you can withdraw as a lumpsum is from your savings pot (and 1/3 of your vesting pot). Therefore, taking money out early reduces the amount of cash available at retirement.
• R550 000 tax-free benefit: this may not be fully used if you don’t have enough savings in your pot to withdraw at retirement.
  
  

Tax Implications: Withdrawing from your Retirement Pot

Tax Rate

You can’t access money in the Retirement Pot until you reach retirement age. Unlike the old rules, you can’t access this money if you resign from your job or are retrenched. Therefore, tax payable on this pot is deferred until you actually retire.

You have to use this money to buy a monthly annuity (i.e. pension) when you retire and the current tax rules in place for annuity income will remain. Click here for details.

Pros

• Tax Deferral: you only pay taxes on this pot when you retire. If your income is lower in retirement, you might pay less in taxes.
• Encourages Saving: helps you keep money saved for your future retirement, which can be crucial for long-term financial security.

Cons

• Less Immediate Access: you can’t access this money before retirement if you are retrenched or resign from your job, which can be a limitation if you face unexpected expenses.
• Requires Planning: you need to plan carefully to ensure you have enough saved for retirement since you can’t touch this money early.

Conclusion

The Two-Pot Retirement System introduces a new way to manage and access your retirement savings. While the Two-Pot System offers flexibility, it’s crucial to understand that withdrawals from it are taxed at your marginal tax rate and should be reserved for real emergencies. The main goal of your retirement fund is to secure your future, so you should avoid withdrawing from it if possible.

If you do need to access it, make sure that you plan your withdrawals and understand how it will affect your taxes and liquidity at retirement. Consulting a financial advisor can help you manage your withdrawals effectively and avoid surprises in your tax bill.