The first year of the two-pot retirement system offers some interesting insights into how members are responding to the new rules.
A year after the two-pot retirement system was implemented to give pension fund members access to a third of their retirement savings in case of an emergency, administrators can now build a picture of whether members are withdrawing for the right reasons and will they withdraw funds every year?
Pension fund members are allowed to withdraw once a financial year, which means that people who withdrew between 1 September 2024 and 28 February this year, could withdraw again from 1 March when the new financial year started.
Rob Southey, head of asset consulting at Momentum Corporate, says pension fund members already withdrew approximately R60 billion since the two-pot system was implemented a year ago.
He points out that the National Treasury said in a recent briefing to the National Council of Provinces that 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.
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Teething problems at start of two-pot retirement system
“While the new system faces some teething issues, including some administrative hurdles, monitoring and evaluation mechanisms are applied to ensure its effectiveness. The Revenue Laws Amendment Bill of 2025 provides for further corrections and technical changes to the system,” Southery said.
He says that initial concerns about widespread, frivolous withdrawals did not materialise to the extent that many people expected, with data indicating that most withdrawals are 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 members seem to be using the withdrawals to pay down informal debt, such as payday loans, with the debt cycle often restarting the following month.”
Southey says the fact that most members use funds for essentials suggests that financial institutions’ extensive communication efforts 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.”
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Big surprise of two-pot retirement system: the taxman waiting on the other side
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, such as unpaid PAYE, will be seized from the withdrawal amount, he says.
“In response, Sars made an online tax calculator available on its website to calculate how much tax will be due based on the amount being withdrawn. The Treasury reports some hesitation at using the calculator due to concerns about providing personal information to Sars.
“Future versions of the calculator may therefore exclude the need for personal details in an effort to improve public confidence and understanding.”
Southey says the Treasury opposed calls for withdrawal benefits to be tax free, arguing that contributions to retirement funds are already tax deductible.
“While low-income earners have limited tax implications, the Treasury acknowledged that some individuals will be pushed above their tax-free threshold when they make a withdrawal, 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.”
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Most significant lesson about two-pot retirement system
According to Southey, the most significant lesson yet that everybody must still fully learn will come when the first cohort of members who 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. People who spend 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.”
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Two-pot retirement system withdrawal around the age of 55
And what happens to people closer to retirement? Southey says a 55 year old who elected to opt in to the two-pot retirement system, with R2 million in the vested pot and who earns a monthly income of R49 000, will retire at 65 with R4.411 million without any withdrawals. Withdrawing every year will mean retiring with R3.969 million.
He says for younger people in particular, the consequences of withdrawals are still years away and they may not yet fully comprehend what will happen.
“It is also important to discuss 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 them, 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.”
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Better communication and education needed for two-pot retirement system
He says while communication and education must continue, it must 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.”
Southey says while the first year has been a learning curve, the foundation of the two-pot retirement 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.”