Approximately R60 billion has been withdrawn since South Africa’s two-pot retirement fund system was implemented a year ago.
In a recent briefing to the National Council of Provinces, National Treasury said the introduction of the two-pot system has been largely successful, improving public engagement with retirement funds, exposing non-compliance by some employers, and ensuring better long-term retirement savings.
While the new system faces some teething issues, including some administrative hurdles, monitoring and evaluation mechanisms are being applied to ensure its effectiveness.
The Revenue Laws Amendment Bill of 2025 provides for further corrections and technical changes to the system.
Interesting insights
According to Momentum Corporate’s Rob Southey, this first year has offered some interesting insights into how members are responding to the new rules and what challenges still need to be addressed.
Initial concerns about widespread, frivolous withdrawals haven’t materialised to the extent that many expected with data indicating that most withdrawals are being used to reduce debt, pay for education and put down deposits on second hand vehicles.
One of the most striking findings is the high rate of repeat withdrawals.
Of those who withdrew funds when the new rules came into effect, typically more than 80% are repeat withdrawers, accessing their savings pot multiple times.
This suggests that a segment of the population is relying on these withdrawals annually, likely for ongoing financial pressures rather than one-off emergencies.
Some seem to be using the withdrawals to pay down informal debt, such as payday loans, with the debt cycle often restarting the following month.
The fact that most members are using funds for essentials suggests that the extensive communication efforts by financial institutions and the government have been effective.
Members appear to understand the serious implications of withdrawals, and a sense of caution seems to have set in, with most people avoiding using the funds for 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made an online tax calculator available on its website to calculate how much tax will be due based on the amount being withdrawn.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 most significant lesson yet to be fully learned will come when the first cohort of members who have made withdrawals from their savings pot reaches retirement age.
They may be surprised to discover exactly how much their tax-free cash lump sum at retirement has been reduced by their savings pot withdrawals.
An individual who spends 40 years saving for retirement, starting at age 25 with a pensionable salary of R20 000 will have a retirement fund valued at R5.182 million (in today’s money) at age 65 if they have made no 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 elected to opt in to the two-pot regime, with R2 million in their vested pot and who earns a monthly income of R49 000, will retire at 65 with R4.411 million if they make no withdrawals.
However, if they withdraw their entire savings pot each year, they will retire with R3.969 million.
For younger people in particular, the consequences of withdrawals are still years away, and may not yet be fully comprehended.
An important discussion that needs to happen is whether members should have a different investment strategy for their savings pot compared to their retirement pot.
While most funds currently maintain a single, long-term strategy for both pots, this may not be suitable for members who intend to make regular withdrawals 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.
Have you made any retirement withdrawals to date?
Let us know by leaving a comment below, or send a WhatsApp to 060 011 021 1
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