Pension Fund Withdrawal Rules: Complete Guide

Imagine you’re Sipho, a 35-year-old South African earning R25,000 a month, diligently saving for retirement. You’ve contributed to your pension fund for years but heard about changes to withdrawal rules and the new Two-Pot System. You want to understand exactly how these rules affect your retirement planning, taxes, and what your options are today. This guide is for workers like Sipho — anyone who wants to confidently plan for retirement, know their rights, and make smart financial decisions under South Africa’s 2024 pension fund regulations.

What is the Two-Pot System?

Implemented in September 2024, the Two-Pot Retirement System changes how retirement contributions are split and accessed. Instead of a single pension fund pot, your retirement savings are divided into two separate pots:

• Savings Pot: This is 1/3 of your contributions starting from September 2024 onward. You can access this pot once per tax year for emergencies or other needs, with a minimum withdrawal of R2,000. There is no maximum withdrawal limit but only one withdrawal is allowed per tax year (March to February).
• Retirement Pot: The remaining 2/3 of your contributions are locked away until retirement age (normally 55 or older). You cannot withdraw from this pot early.

Additionally, there’s a Vested Pot which contains all contributions made before September 2024. This pot is governed by the old withdrawal rules, allowing one withdrawal before retirement (usually on resignation or retrenchment).

If you choose not to withdraw from the savings pot, it continues growing tax-free until retirement, when it becomes part of your retirement lump sum. Withdrawals from the savings pot are taxed at your marginal rate, whereas retirement lump sums are taxed using the special retirement lump sum tax tables.

Key points:

• Only one withdrawal per tax year from the savings pot.
• Minimum withdrawal R2,000.
• Withdrawals are taxable at your personal marginal tax rate.
• Retirement pot is inaccessible until retirement age.
• Vested pot withdrawals follow old rules (one withdrawal allowed before retirement).

Example of Two-Pot System Contribution Split

Sipho earns R25,000 monthly and contributes 15% of his salary to his pension fund (R3,750 per month). Since September 2024, every R3,750 contribution is split as follows:

• Savings Pot: 1/3 of R3,750 = R1,250
• Retirement Pot: 2/3 of R3,750 = R2,500

After a year, his savings pot will have R15,000 (R1,250 x 12) accessible once per tax year (after minimum R2,000 withdrawal applies).

How Retirement Annuities Work in South Africa (SARS Regulations)

Retirement annuities (RAs) are a popular retirement savings vehicle in South Africa offering tax advantages. Contributions are deductible against taxable income up to certain limits:

• Annual deduction limit: 27.5% of your taxable income or remuneration, capped at R350,000 per year (whichever is lower).
• If you contribute less than the limit in a year, you can carry forward unused deductions for up to 3 years.

Withdrawals from RAs before retirement age are generally not allowed except under specific circumstances (e.g., permanent disability or emigration). Upon retirement (usually age 55 or older), you can withdraw a portion as a lump sum, and the rest must be used to purchase a living or annuity income.

SARS Retirement Lump Sum Tax Table 2024 (for withdrawals at retirement):

Withdrawals from the savings pot before retirement are taxed at your marginal tax rate, which may be higher than the lump sum tax rates. Hence, using the savings pot withdrawal option should be carefully planned.

Example of Retirement Annuity Tax Deduction

If Sipho earns R300,000 taxable income annually, the maximum RA contribution deductible is:

27.5% × R300,000 = R82,500

Sipho can deduct up to R82,500 of RA contributions from his taxable income, reducing his tax bill.

Step-by-Step Retirement Planning Guide

1. Calculate your retirement needs. Consider your current expenses, lifestyle, and inflation.
2. Maximise your tax-deductible contributions. Aim to contribute up to 27.5% of your income or R350,000 annually to retirement annuities.
3. Understand your Two-Pot System split. Plan for emergencies by knowing how much will be in your savings pot.
4. Consider investing additionally in a Tax-Free Savings Account (TFSA). Annual contribution limit is R36,000, lifetime R500,000. TFSA withdrawals are tax-free anytime.
5. Review your pension fund options annually. Check your statements and adjust contributions if needed.
6. At retirement, decide on lump sum withdrawal versus annuity income. Withdraw lump sum up to R500,000 tax-free across all retirement benefits.

Practical Example

Sipho, earning R25,000 monthly, contributes 15% (R3,750) monthly to his RA. After one year, his total contribution is R45,000.

• Deductible amount: 27.5% × R300,000 = R82,500 (Sipho’s R45,000 is fully deductible this year)
• Savings pot portion: R15,000 (1/3 of contributions)
• Retirement pot portion: R30,000 (2/3 of contributions)

If Sipho withdraws R10,000 from his savings pot in the tax year, this R10,000 will be taxed at his marginal tax rate (say 18%). So tax payable on withdrawal = R1,800.

Tax Benefits and Deductions

• Retirement Annuity Contributions: Deductible up to 27.5% of taxable income or R350,000 per year.
• Tax-Free Savings Account (TFSA): Annual contribution limit R36,000; lifetime cap R500,000. No tax on contributions, growth, or withdrawals.
• Withdrawals from Savings Pot: Taxed at your marginal rate, minimum withdrawal R2,000 once per tax year.
• Retirement Lump Sum Withdrawals: Taxed per SARS retirement lump sum table with R500,000 total tax-free limit across all retirement funds.

Retirement Annuity vs Tax-Free Savings Account (TFSA)

How to Choose the Right Retirement Product

• Consider your income level and ability to contribute.
• Use RAs for tax deductions and long-term growth.
• Use TFSAs for flexible, tax-free access to savings.
• Assess fund fees, investment options, and service quality.
• Consult with providers like Allan Gray, Coronation, Satrix, or EasyEquities for tailored solutions.

Common Retirement Planning Mistakes to Avoid

• Ignoring the Two-Pot System’s impact on withdrawal flexibility.
• Not maximising your RA tax deductions annually.
• Withdrawing prematurely from your savings pot without planning for taxes.
• Failing to invest in a TFSA for accessible savings.
• Choosing retirement funds with high fees or limited investment options.

How to Get Started

1. Check your current retirement fund statements to understand your vested, savings, and retirement pots.
2. Calculate your maximum tax-deductible RA contribution based on your taxable income.
3. Open or review a Tax-Free Savings Account (TFSA) with providers like Allan Gray, Coronation, Satrix, or EasyEquities. These platforms offer diverse investment options with competitive fees.
4. Set up monthly contributions to your RA and TFSA based on your budget and limits.
5. Monitor your contributions and withdrawals annually to ensure you stay within SARS limits and avoid unexpected taxes.
6. At retirement, consult a financial advisor to plan lump sum withdrawals and annuity purchases for optimal tax efficiency.

Conclusion: Take Control of Your Retirement Today

Understanding the 2024 pension fund withdrawal rules and the Two-Pot System is crucial for South African workers. By maximising your tax-deductible contributions, planning your savings and retirement pots, and using TFSAs for flexibility, you can build a secure retirement nest egg.

Start by reviewing your current contributions, open a TFSA if you haven’t, and consider trusted providers like Allan Gray, Coronation, Satrix, or EasyEquities. Keep track of SARS deadlines and limits, and avoid common mistakes like premature withdrawals or under-contributing.

Retirement planning is a marathon, not a sprint. With the right knowledge and action steps, you can retire comfortably and tax-efficiently.