Understanding the Two Pot System

What Is the Two Pot System?

The two pot system is a structural reform to South Africa's retirement savings framework that took effect on 1 September 2024. It divides all new retirement fund contributions into two distinct components: a savings pot that members can access once per tax year before retirement, and a retirement pot that is preserved and can only be accessed at retirement. A third component, the vested pot, holds all savings accumulated before 1 September 2024 and remains subject to the rules that applied before the reform.

The reform applies to pension funds, provident funds, retirement annuity funds, and preservation funds. It was introduced through amendments to the Income Tax Act and the Pension Funds Act, and it fundamentally changes the trade-off between liquidity and long-term income security for South African retirement fund members.

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How the Three Components Work

The Savings Pot

From 1 September 2024, one third of every new contribution flows into the savings pot. Members may make one withdrawal from this pot per tax year (1 March to end of February), subject to a minimum withdrawal amount of R2 000. There is no upper limit on the amount that can be withdrawn in a single tax year, provided the balance in the savings pot supports it.

Withdrawals from the savings pot are taxed as ordinary income in the year of withdrawal, at the member's marginal tax rate. This is a critical point: the withdrawal is added to all other taxable income for that year, which means a large withdrawal could push a member into a higher tax bracket. SARS collects this tax at source through the fund administrator before the net amount reaches the member.

At retirement, any remaining balance in the savings pot can be taken as a lump sum (taxed under retirement lump sum tables) or used to purchase an annuity.

The Retirement Pot

Two thirds of every new contribution flows into the retirement pot. This component is strictly preserved: it cannot be accessed before retirement under any circumstances, including resignation, retrenchment, or financial hardship. At retirement, the full retirement pot must be used to purchase an annuity (a living annuity or a life annuity), providing a regular income stream.

This compulsory annuitisation of the retirement pot is the mechanism that addresses the long-standing problem of South Africans exhausting their savings shortly after leaving employment.

The Vested Pot

All accumulated savings as at 31 August 2024 are ringfenced in the vested pot. The pre-existing rules continue to apply: provident fund members who were 55 or older on 1 March 2021 retain the right to take their full vested pot as a lump sum at retirement. Other members may access the vested pot on resignation or retrenchment under the rules that applied before September 2024, or at retirement subject to the one-third lump sum, two-thirds annuity rule that applied to pension funds.

A once-off seeding allocation was applied at inception: up to 10% of the vested pot value (capped at R30 000) was transferred into the savings pot to give members an immediate balance to draw from if needed. Not all funds implemented this at exactly the same time, and members should confirm the position with their fund administrator.

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Two Pot System Withdrawal: What You Need to Know

Eligibility and Process

To make a savings pot withdrawal, a member must:

1. Submit a withdrawal application to their fund administrator or employer (for workplace funds).
2. Have a balance of at least R2 000 in the savings pot.
3. Not have made another savings pot withdrawal in the same tax year.

The fund administrator verifies the application, obtains a tax directive from SARS (which confirms the applicable tax rate), deducts the tax, and pays the net amount to the member. Processing times vary by fund but the legislative requirement is that funds process valid applications within a reasonable period. In practice, many large funds targeted a turnaround of five to ten business days after the system opened, though high volumes in the initial months caused delays at some administrators.

Tax on Withdrawals

The tax treatment is straightforward in principle but requires careful planning in practice. The gross withdrawal amount is added to the member's taxable income for the tax year. If a member earns R400 000 in salary and withdraws R50 000 from the savings pot, SARS treats their taxable income for that year as R450 000 for the purposes of calculating the marginal rate applicable to the withdrawal.

Members who are close to a tax bracket threshold should model the after-tax value of a withdrawal before submitting an application. A financial adviser or tax practitioner can assist with this calculation. SARS does not allow the tax on savings pot withdrawals to be offset against retirement fund contribution deductions in the same year.

Costs and Deductions

Some fund administrators levy an administration fee for processing savings pot withdrawals. The rules permit this, and the fee is deducted from the withdrawal amount before payment. Members should check their fund's fee schedule before applying, as repeated small withdrawals can erode value quickly when fees are applied each time.

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GEPF and the Two Pot System

The Government Employees Pension Fund (GEPF) is the largest pension fund in Africa by membership and assets under management. A common question is whether the two pot system applies to GEPF members.

The GEPF is a defined benefit fund governed by the Government Employees Pension Law (GEPL) rather than the Pension Funds Act. As a result, the two pot system reforms do not automatically apply to the GEPF in the same way they apply to defined contribution funds. The National Treasury and the GEPF have been engaged in a separate legislative process to determine how the two pot principles will be extended to defined benefit funds, including the GEPF.

As at the time of writing, GEPF members do not have access to the savings pot withdrawal mechanism available to members of funds governed by the Pension Funds Act. GEPF members should monitor official communications from the GEPF and National Treasury for updates. Any extension of the two pot framework to the GEPF will require its own enabling legislation.

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Two Pot System Latest News and Developments

The two pot system launched on 1 September 2024 after several years of consultation, draft legislation, and delays. The initial weeks saw extremely high volumes of withdrawal applications across major retirement fund administrators, reflecting significant pent-up demand from members who needed liquidity.

SARS reported processing hundreds of thousands of tax directives in the first weeks of the system's operation, and National Treasury indicated that the volume of withdrawals was broadly in line with projections, though some administrators struggled with system capacity in the early period.

Key areas that continue to evolve include:

• Defined benefit fund inclusion: National Treasury has signalled its intention to extend the two pot framework to funds like the GEPF, but the timeline and legislative mechanism remain under development.
• Divorce and maintenance orders: The interaction between savings pot balances and divorce order clean-break provisions is being clarified through fund rule amendments and guidance from the Financial Sector Conduct Authority (FSCA).
• Emigration and non-resident withdrawals: Members who have formally emigrated or are tax non-residents face specific rules around fund withdrawals. The two pot system does not override exchange control or SARS residency rules, and members in this position should obtain specialist advice.
• Fund rule amendments: All retirement funds were required to amend their rules to accommodate the two pot structure. The FSCA has been processing a large volume of rule amendment applications, and members of smaller funds should confirm that their fund's rules have been formally approved.

For the most current position on any of these matters, the primary sources are the National Treasury website, the FSCA, and SARS.

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Why the Reform Was Introduced

South Africa has historically had one of the lowest retirement adequacy rates among countries with formal retirement fund systems. Research consistently showed that the majority of South Africans who reached retirement age did not have sufficient savings to maintain their pre-retirement standard of living. A significant contributor to this outcome was the practice of cashing out retirement savings on resignation or retrenchment rather than preserving them.

At the same time, the absence of any pre-retirement access to retirement savings created hardship for members facing genuine financial emergencies, and drove some to resign from employment purely to access their fund benefits. This destroyed both their retirement savings and, in many cases, their employment record.

The two pot system attempts to resolve both problems simultaneously: the savings pot provides a limited, taxable liquidity valve that removes the incentive to resign for cash, while the compulsory preservation of the retirement pot protects the majority of new savings from pre-retirement erosion.

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Practical Implications for Members and Advisers

For Individual Members

The most important discipline for members is to treat the savings pot as an emergency reserve rather than a supplementary income source. Every withdrawal reduces the capital that would otherwise compound over the remaining working years. A R20 000 withdrawal at age 35, in a fund earning 8% per year net of fees, forgoes approximately R200 000 in real terms by age 65. That figure is illustrative and will vary with actual fund performance and contribution rates, but the compounding effect of early withdrawals is material.

Members should also note that the savings pot does not accumulate separately from the retirement pot in terms of investment strategy: both pots are typically invested in the same underlying portfolio, and the split is an accounting allocation rather than a separate investment account in most fund structures.

For Financial Advisers and Fund Administrators

The two pot system creates both an advisory opportunity and a compliance responsibility. Advisers working with individual clients should incorporate savings pot balances into annual financial plans, model the tax impact of any proposed withdrawal, and document the advice given. The FSCA's conduct standards require that advice on retirement fund matters is appropriate to the client's circumstances and that the long-term impact on retirement income is disclosed.

Fund administrators must ensure that withdrawal processing systems are integrated with SARS for real-time or near-real-time tax directive retrieval, that member communication is clear and accurate, and that fee disclosures meet the requirements of Regulation 28 and the Pension Funds Act.

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Key Terms Defined

Savings pot: The one-third component of new retirement contributions that can be accessed once per tax year before retirement, subject to a R2 000 minimum withdrawal and taxation at marginal income tax rates.

Retirement pot: The two-thirds component of new contributions that is preserved until retirement and must be used to purchase an annuity.

Vested pot: All retirement savings accumulated before 1 September 2024, governed by the pre-reform rules applicable to each fund type.

Tax directive: An instruction from SARS to a fund administrator specifying the tax rate to be applied to a specific withdrawal, obtained before the withdrawal is processed.

Annuity: A financial product that converts a lump sum into a regular income stream, either for a fixed period or for life. The retirement pot must be used to purchase an annuity at retirement.

GEPF: The Government Employees Pension Fund, a defined benefit fund for South African public servants, currently outside the standard two pot framework pending separate legislation.

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Summary: What the Two Pot System Means for Retirement Planning

The two pot system is the most significant structural change to South African retirement fund law in a generation. It preserves the tax efficiency of retirement fund contributions while introducing a controlled liquidity mechanism that did not previously exist. For members, the discipline required is to use the savings pot sparingly and strategically. For advisers and administrators, it creates a new layer of ongoing engagement with clients and a more complex operational environment.

The reform does not solve the retirement savings gap on its own: that requires higher contribution rates, longer savings periods, and lower costs. But it removes a structural incentive to destroy retirement savings prematurely, and that is a meaningful step in the right direction.