One year on: South Africans draw key lessons from the two-pot retirement system

Since South Africa implemented the two-pot retirement fund system a year ago, members have withdrawn about R60 billion.

In a recent briefing to the National Council of Provinces, National Treasury reported that the two-pot system has been largely successful. It has improved public engagement with retirement funds, exposed non-compliance by some employers, and strengthened long-term retirement savings.

Although the system still faces teething issues, including administrative hurdles, officials are applying monitoring and evaluation mechanisms to ensure its effectiveness. The Revenue Laws Amendment Bill of 2025 introduces further corrections and technical adjustments to the system.

Interesting insights

Momentum Corporate’s Rob Southey said the first year of the two-pot retirement system has revealed interesting insights into how members are responding to the new rules and what challenges remain.

He noted that initial fears of widespread, frivolous withdrawals did not materialise as expected. Data shows that most members are using their withdrawals to reduce debt, pay for education, or put down deposits on second-hand vehicles.

One of the most striking findings, Southey explained, is the high rate of repeat withdrawals. More than 80% of those who accessed funds when the new rules took effect have withdrawn again, often multiple times.

This trend suggests that a portion of the population is relying on these annual withdrawals to manage ongoing financial pressures rather than one-off emergencies.

Some members are using the withdrawals to settle informal debt, such as payday loans, only to restart the debt cycle the following month.

The fact that most members are directing funds toward essentials shows that financial institutions and the government have communicated effectively.

Members seem to understand the serious implications of withdrawals, and most are exercising caution by avoiding spending the money on luxuries.

Tax implications

Many retirement fund members who made early withdrawals were surprised by the tax implications after failing to appreciate that withdrawals are taxed at their marginal tax rate, and that any outstanding SARS debt – like unpaid PAYE – will be seized from the withdrawal amount. 

In response, SARS has made an online tax calculator available on its website to calculate how much tax will be due based on the amount being withdrawn.

National Treasury reports some hesitation around using the calculator due to concerns about providing personal information to SARS.

Future iterations of the calculator may therefore exclude the need for personal details in an effort to improve public confidence and understanding. 

National Treasury has opposed calls for savings withdrawal benefits to be tax free, arguing that contributions to retirement funds are already tax deductible.

While low-income earners have limited tax implications, National Treasury has acknowledged that some individuals will be pushed above their tax-free threshold when they make a withdrawal, thus creating a tax liability.

For example, if somebody earning R80 000 annually withdraws R20 000, it will push their taxable income above the tax-free threshold.

What needs to happen next

The biggest lesson will come when the first group of members who withdrew from their savings pot reaches retirement age.

They may discover with surprise how much their tax-free cash lump sum at retirement has shrunk because of those withdrawals.

For example, an individual who saves for 40 years from age 25 on a pensionable salary of R20,000 will retire at 65 with a fund worth R5.182 million (in today’s money) if they never make withdrawals.

However, if they withdraw their entire savings pot each year, the value of the investment at age 65 will be a significantly lower R3.443 million.

What happens to people closer to retirement?

A 55-year-old individual who opted into the two-pot regime with R2 million in their vested pot and a monthly income of R49,000 will retire at 65 with R4.411 million if they never withdraw funds.

If they withdraw their entire savings pot each year, however, they will retire with only R3.969 million.

Younger members in particular may not yet fully grasp the long-term consequences of making withdrawals.

Industry experts stress the need to debate whether members should adopt different investment strategies for their savings pot and their retirement pot.

Currently, most funds apply a single long-term strategy for both, but this approach may not work for members who plan to withdraw regularly from their savings pot.

For these individuals, a less volatile, money-market-type investment strategy might be more appropriate.

The current complexity and a lack of administrative capability among some major fund administrators have so far hindered this conversation.

Consequences of withdrawal

While communication and education must continue, it needs to evolve.

The focus should shift from explaining the rules of the two-pot system to demonstrating the consequences of withdrawals through helpful scenarios.

Using examples that show the long-term impact on retirement savings will be crucial to helping people make informed decisions.

Given the complexity of the issue, the importance of financial advice should not be underestimated.

Advice needs to be accessible to all members, not just the wealthy. Fund trustees have a critical role to play here.

Some funds have successfully implemented systems where they endorse specific financial advisers or advisory firms.

This creates a layer of governance and accountability, ensuring members receive sound advice.

While this adds a new responsibility for trustees, it’s a necessary step to protect members and mitigate the risks inherent in the two-pot system.

While the first year has been a learning curve, the foundation of the two-pot system seems to be holding.

The challenge now lies in anticipating future pitfalls and building a support structure that empowers members to navigate their retirement journey with confidence and foresight.