The long-awaited two-pot system came into effect on 1 September 2024, enabling millions of South Africans to access a portion of their retirement fund savings before retirement. Given the country’s tough economic climate, many have seized this opportunity with urgency – tapping into their retirement savings as a financial lifeline. So far, a staggering R43 billion two-pot withdrawals have been paid out to retirement fund members1. The two-pot reform affects all retirement funds, changing the landscape for individual investors with retirement annuities (RAs) as well.
So how does the two-pot retirement system impact RA investors?
Before the two-pot system, RA investors had to wait until age 55 to access their retirement capital2. Now, like other retirement fund members, they may withdraw a portion of their retirement capital annually – if needed. The new system splits your RA contributions into two pots: a Savings component and a Retirement component. Additionally, for those who accumulated retirement savings before 31 August 2024, there is a third Vested component.
Withdrawals are only allowed from the Savings component, with a minimum withdrawal of R2 000 per tax year. The rest of the retirement capital remains preserved for retirement3.
Figure 1: Contributions are split between the Savings and Retirement components from 1 September 2024
Source: Ninety One.
Remember, withdrawal is a choice
Although RA investors can make early withdrawals from their retirement savings, it’s entirely optional. A common misconception is that you must withdraw early – or risk losing your funds in the Savings component (also known as the Savings pot). In reality, early withdrawal is a choice. If you decide to leave your money in the Savings component of your RA, it will have the opportunity to grow alongside the Retirement and Vested4 components, resulting in a much larger nest egg at retirement.
The impact of Savings pot withdrawals on retirement capital
Let’s assume there are two RA investors, both contributing R100 000 annually to their RA over 20 years. Each year, one-third of their contribution goes to the Savings component, while two-thirds is allocated to the Retirement component. We assume their portfolio generates a return of 5% above CPI inflation per year.
Over the 20-year period:
- Investor A withdraws all available funds from their Savings pot every tax year.
- Investor B leaves their Savings pot untouched, allowing it to grow along with the rest of their RA portfolio.
The difference is striking: after 20 years, Investor A accumulated R2.26 million, while Investor B’s nest egg grew to R3.39 million – a significant gap, as illustrated in Figure 2.
Figure 2: Frequent withdrawals from your RA Savings pot will deplete your retirement nest egg
RA with and without annual Savings pot withdrawals (AUM in real terms)
Source: Ninety One. For illustrative purposes only. Losses may be made. The assumed return of CPI + 5% p.a. is used for illustrative purposes only and does not take into account market conditions or the costs associated with investing. The assets under management (AUM) shown in the chart are in real terms (i.e. in today’s money terms).
In a nutshell, withdrawing all the funds from your Savings pot every year – which receives a third of your annual RA contribution – can reduce your total retirement portfolio by approximately a third compared to leaving it untouched. That’s a sobering thought.
Don’t forget about tax when making a two‑pot withdrawal
When you contribute to an RA, you benefit from valuable tax advantages. Your contributions are tax-deductible within certain limits5, and the growth on your investment is tax-free – no income tax, dividends tax or capital gains tax6.
However, pre-retirement withdrawals from your Savings pot come at a cost. These withdrawals are taxed at your marginal rate, which means you could receive significantly less than the amount you withdraw. In some cases, a withdrawal may even push you into a higher tax bracket, increasing your overall tax burden.
Additionally, if you owe a penalty to the South African Revenue Service (SARS) under an IT88 order, this amount will be deducted from your withdrawal proceeds. As a result, after taxes and any applicable penalties, the amount you receive could be far lower than expected. For a more detailed breakdown of the tax impact, read our previous article.
Think carefully before dipping into your Savings pot
Before accessing your Savings pot, consider the long-term impact on your retirement savings. If you choose to make a withdrawal, we encourage you to use SARS’s two-pot retirement system calculator to estimate the tax that will be deducted – so there are no unpleasant surprises.
Building an emergency fund can help you avoid pre-retirement withdrawals from your Savings pot, protecting your long-term financial security and preventing you from cashing in your future.
For more information on the two-pot retirement system, visit our hub.
1 The South African Revenue Service (SARS) reported that a total gross lump sum of approximately R43.42 billion has been paid out (two-pot retirement system withdrawals) – as at 31 January 2025.
2 With a few exceptions stipulated in members’ retirement fund rules.
3 For more information on two-pot retirement reform, please visit our hub.
4 You will only have a Vested component if you had accumulated retirement savings up to 31 August 2024. Your benefit statement should indicate this.
5 Up to 27.5% of your taxable income (capped at R350 000 per tax year).
6 Please note that lump sums paid to fund members who are retiring will be taxed according to the retirement tax table, and annuity income after retirement, will be taxed according to the personal income tax table.
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Two-pot retirement reform
