Feature: The two-pot system: A new chapter

THE IMPLEMENTATION OF THE TWO-POT SYSTEM on 1 September 2024 was not just a legislative change but a fundamental shift in how retirement funds are managed in South Africa. The objective is to improve preservation throughout members’ working lifetimes, improve outcomes in retirement and simplify the retirement system. The two-pot system addresses these key issues by providing a balanced solution that accommodates short-term needs and long-term retirement objectives.

IMPLEMENTATION AND ADMINISTRATION

Legislative change does come at a cost. The introduction of the two-pot system has gone far beyond simply enabling savings pot claims – it has driven extensive, transformative changes across the breadth and depth of the retirement industry. Major changes were necessary to keep services sustainable, prioritise customers’ interests and allocate resources efficiently. The goal was to integrate change while maintaining business continuity − such as handling retirements, resignations and deaths − with minimal disruption.

The two-pot system affects all retirement fund members, not just those withdrawing savings. Member records are now split into separate pots, with transactions and reporting on each. Members must be able to track each pot and its growth. Digital tools have been updated to support changes in how withdrawals, retirements, housing loans and divorce deductions, among other transactions, are processed and accessed by members. Fund rules have been revised to align with new legislation. These changes highlight the critical importance of clear communication, benefit counselling and access to financial advice throughout members’ lifetimes.

Members’ accrued rights up to 31 August 2024 remain
in place in the vested pot and are subject to the legislation prior to the introduction of two-pot. The only exception relates to seed capital, which provided the starting balance for the savings pot.

WHAT HAS OUR EXPERIENCE BEEN?

Across South Africa’s retirement fund landscape, more than 2 million taxpayers withdrew from their savings pot, with a gross lumpsum of R43,4 billion processed between 1 September 2024 and 31 January 2025.¹ Among the
1,1 million actively contributing members administered by Alexforbes, more than 650 000 savings pot claims worth R9,5 billion were processed in the first year.

In the current tax year (since 1 March 2025), over 270 000 claims worth R2,5 billion have already been paid. These claims are in addition to the ‘normal’ claims received for processing, such as retirements and resignations.

A key trend has been the high rate of repeat withdrawals. According to Natasha Huggett-Henchie, consulting actuary and member of the Actuarial Society of South Africa (ASSA) Retirement Matters Committee, retirement fund administrators represented on the committee reported that around 75% of applications received in the current tax year were repeat claims.² This trend was also evident at Alexforbes, where 70% of members who accessed their savings pots this tax year had already withdrawn in the previous year. This reflects the reality of high indebtedness in South Africa, where the debt-to-income ratio was recorded at 62,50%³ at the end of 2024.

Some key member insights from Alexforbes reveal
the following:

5% of provident fund members who were 55 or older on 1 March 2021 opted into the two-pot system by 31 August 2025. From 1 September 2025, members who did not opt in will no longer have the option to participate.

65% of members have not withdrawn from their savings pots, demonstrating that many members are making informed decision and prioritising long-term financial security.

Of the 35% of members who have withdrawn from their savings pots:

• 14% withdrew in both tax years
• 15% withdrew in the previous tax year only
• 6% withdrew in the current tax year for the first time

RETIREMENT POT – IMPROVING PRESERVATION

Although members have access to their savings pot, the long-term benefit lies in the retirement pot. Since 1 September 2024, two-thirds of contributions (66,7%) have been directed into retirement pots, accumulating to an average balance of R22 000.

These funds are only available upon retirement, at which point the member is required to use this money to buy a pension. Based on internal modelling, Alexforbes estimates that retirement outcomes for new members could improve by 2 to 2,5 times, a critical gain given that current replacement ratios average only 31% (equal to R310 of income for every R1 000 earned before retirement). However, to truly improve retirement outcomes, contribution levels must be adequate. At a contribution rate of 8%, only 5,3% is allocated to the retirement pot which may be insufficient to secure adequate retirement income. This highlights the importance of adequate counselling and financial advice to help members make informed decisions about their long-term financial wellbeing.

Counselling can help members −

• Understand the impact of contribution levels on future retirement income
• Evaluate the trade-offs between accessing savings now versus preserving funds for retirement
• Navigate complex decisions such as opting into the two-pot system, adjusting contribution rates, or selecting appropriate annuity options at retirement
• Plan for life events like divorce, retrenchment, or housing loans which may affect retirement savings

Without adequate guidance, members may unintentionally compromise their financial security in retirement − making counselling a critical support mechanism in the two-pot system.

SAVINGS POT – CASH IN RETIREMENT

The money in the savings pot will be the only cash that a member may access upon retirement (along with any applicable money in the vested pot). It is therefore important to evaluate any decision to access these funds before retirement to ensure the reasons are appropriate and aligned with long-term financial goals.

For example, at retirement, savings pot cash may be used to settle final debts, go on holiday, or invest in a vehicle to provide additional income during retirement.

Cash withdrawn from the savings pot at retirement will be taxed according to the prevailing retirement lump-sum tax tables, which are generally more favourable than the marginal income tax rates applied to savings pot withdrawals while still working. No part of the retirement component can be accessed as cash, which underscores the importance of maintaining sufficient funds in the savings pot for immediate financial needs at retirement.

GOALS-BASED SAVINGS

The two-pot system has transformed the financial decision-making for members of group retirement funds by introducing flexibility. Members are no longer limited to making financial decisions only at the point of exit from their fund, they may now access their savings while still working. This shift underscores the importance of financial literacy and the need for members to set financial goals early, monitor their progress, and consult a financial advisor as soon as possible.

While the flexibility to access the savings component may be tempting, it is crucial for members to resist using these funds for non-essential purposes. The savings pot is not a source of instant gratification but rather a critical part of ensuring financial security in retirement. With accessibility comes greater responsibility.

The reality, as seen over the past year, is that many members will access their savings pot when the need arises, particularly given the lack of emergency funds or discretionary savings available to cover unexpected expenses or financial hardships. However, research and experience show that members can manage their savings responsibly, especially when guided by a goals-based approach. By linking withdrawals to specific objectives – such as reducing unsecured debt, saving for a child’s education, or preparing for retirement income needs – members can make informed decisions that safeguard their long-term financial wellbeing.

A goals-driven strategy empowers members to use their savings pot as a tool for positive change, rather than as a source of impulsive spending. Even those with limited means can benefit, as setting clear savings goals makes the concept of saving more tangible and achievable. By recognising the realities members face and encouraging deliberate, goal-oriented use of their funds, the right advice and support can ensure that accessing the savings pot becomes a constructive step toward financial security rather than a setback.

EMPOWERING MEMBERS WITH ADVICE

Members need to be mindful of the long-term consequences of withdrawing from their retirement savings. Based on certain assumptions, Alexforbes research shows that a member needs a net allocation of 17% to retirement savings over a 40-year period to achieve a replacement ratio of 75% of salary at retirement. This means that while the system can improve preservation, contributions must be appropriate to meet the financial needs of a comfortable retirement. As highlighted earlier, if contributions fall short of the 17% requirement, and only two-thirds are preserved in the retirement pot, members are unlikely to achieve a reasonable outcome.

For this reason, members must understand the implications of their actions and always seek professional advice. The following key points can help guide informed decision-making:

• Withdrawing from the savings pot reduces retirement income and the cash available at retirement. Withdrawals made while still working are subject to marginal income tax rates, which may result in members moving into a higher tax bracket for the year. In contrast, withdrawals at retirement are taxed according to the retirement lump-sum tax tables, which are generally more favourable. Members can use tools like the SARS Simulated Calculator and Alexforbes My Money Matters Toolkit, both publicly accessible, to model the financial and tax impact
  of withdrawals.
• Boosting retirement savings by increasing contributions through flexible contribution rates or voluntary top-ups can help rebuild savings, as current rates are often too low. Contributions made to a retirement fund qualify for tax relief.
• Managing money wisely. Members can use debt solutions, budgeting tools and rewards programmes to stretch their finances further and reduce reliance on retirement savings.
• Preserving the vested pot is critical to protecting long-term retirement benefits and ensuring a stable income stream in retirement.

All members should be able to access professional advice to help tailor their financial journey and guide decision-making across their vested savings and retirement pots, to have a meaningful impact.

LOOKING AHEAD

As the two-pot system continues to evolve, ongoing
data collection and analysis will help clarify its long-term impact on South Africa’s retirement funding landscape. While the initial year presented challenges, it also laid the foundation for future improvements. Member engagement, preservation behaviour and the effects of compounding are beginning to shape more sustainable retirement outcomes.

The system’s development provides insight into how financial mechanisms influence members decision-making, encouraging reflection on how current actions affect future financial security.

IN CONCLUSION

The two-pot system represents a significant shift in
how South Africans save for retirement. While it offers flexibility to address short-term financial needs, it also places greater responsibility on members to plan and manage their finances wisely. By setting goals, seeking advice and making informed decisions, members can navigate this new system successfully and work toward
a financially stable future.

NOTES

1   
https://www.sars.gov.za/media-release/more-than-2-million-taxpayers-withdraw-from-their-savings-pot/.

2   
https://www.moneymarketing.co.za/the-majority-of-two-pot-withdrawal-
are-repeats/.

3   
https://tradingeconomics.com/south-africa/households-debt-to-income.