South Africa implemented the two-pot retirement system on 1 September 2024, but there is still a lot of confusion and misunderstanding about how it works. Certainly, it is a big shift in the retirement investment picture, but the change also offers you a way to preserve your retirement savings – while giving you access to some of that money if you have an urgent financial need before you retire. 

You’ll need to understand the changes to consider the ways they might benefit you under certain conditions. 

Understanding the two-pot system

A little confusingly, the two-pot system divides your retirement savings into three different ‘components’, according to the legislation – a vested component, a retirement component and a savings component.  

Only the retirement and savings components can receive retirement contributions after 1 September 2024 – they are the ‘two pots’ that give the system its name. The vested component will consist of all the retirement benefits you’ve accumulated before this date. 

In summary, the components work as follows:
 

• The vested component will include all retirement savings accumulated by 31 August 2024, minus an initial once-off allocation to the savings component, which is 10% of its value capped at a maximum of R30,000. The vested component works according to existing retirement rules, including the investment growth that would normally apply. You can access these funds only when you leave your employer, or in cases of emigration, disability or death. At retirement, the funds are available as a lump sum or an annuity, depending on the value.
• The retirement component is a reconstituted retirement fund, comprising two-thirds of all pension contributions that you make after 1 September 2024. You can only access these funds at retirement, and under the new law you must use them to buy a retirement income product. 
• The savings component will initially be funded by the once-off allocation of seed capital from your vested component, and then by one-third of the pension contributions that you make after 1 September 2024. You can make one withdrawal, with a minimum of R2,000, from these savings per year. When you reach retirement, the savings can be invested in a retirement income product, or you can take them as a lump sum. 
   

There are exceptions. If you were 55 or older and a member of a provident or provident preservation fund on 1 March 2021 and you’re still a member of the same fund, participation is voluntary – you don’t have to adopt the two-pot retirement system unless you choose to.

Tax and the risk of early withdrawals

If you’re thinking about accessing a portion of your pension savings early, be aware of the tax implications. Withdrawals from your savings pot will be taxed at the marginal rate, which is much higher than the existing tax rate applicable to retirement-fund withdrawals. If you withdraw money from your savings component, the amount will be added to your taxable income for that tax year. Your income tax rate, based on a sliding scale according to your income, will in most cases be higher than the tax rate you’d have paid under the former system. 

The National Treasury insisted on these tax conditions in the legislation, and clearly wants to discourage you from removing funds from your retirement savings too early. But at the same time, it’s likely that many people are going to access up to R30,000 of their retirement savings when they switch to the new system. Those withdrawals will earn significant tax revenue for the fiscus – Treasury anticipates a tax windfall of about R5 billion. This ‘windfall’, however, will come at a high cost for you as a retirement fund member, not only in tax but also in future earnings on your retirement investments.

Funding your retirement: How early withdrawals can hurt 

Withdrawing money from your retirement savings early not only makes your investment less tax-efficient, but it also reduces the compounded interest you’ll earn before retirement. This can leave you with a significantly smaller amount at retirement, to invest in a retirement income product. If you want to make the most of your retirement funding under the new system, you need to continue contributing the same monthly amount (or more) to your retirement savings component and avoid withdrawals. 

On the other hand, you might decide the financial costs are worth it, if a withdrawal from your savings component will enhance your retirement – for example, using the money to renovate your property as a multi-generational homestead. These decisions depend on your individual circumstances, so consult a financial planner to advise you on the retirement plan that suits you.

Nedbank can help you work out how much you need to save for a comfortable retirement at your various life stages. You can also browse our many savings and investment offerings to find those that are right for you. Or speak to a financial adviser to find out more about the two-pot system and the best plan for your retirement savings and investments. 

Thinking about moving your retirement savings? Here’s what you need to know.