Two-Pot System Explained: What Changed in 2024

Imagine you’re a 35-year-old teacher in Cape Town, earning R30,000 a month. You’ve been contributing to your employer’s pension fund for the past 10 years, but lately, you’re worried about your future. You’ve heard about the new Two-Pot retirement system, but you’re not sure how it works, what the tax benefits are, or how to choose between a retirement annuity (RA) and a tax-free savings account (TFSA). You want to make smart choices, but the rules feel complicated and the stakes are high. If this sounds familiar, you’re not alone. South Africa’s retirement landscape changed dramatically on 1 September 2024, and understanding these changes is crucial for anyone planning their financial future. This guide breaks down exactly what’s new, how it affects you, and what you should do next.

What is the Two-Pot System? (Detailed Explanation with 2024 Changes)

South Africa’s Two-Pot retirement system is a major reform designed to give you more flexibility with your retirement savings while still protecting your long-term security. From 1 September 2024, all new contributions to occupational retirement funds (like pension and provident funds) are split into two separate pots: the Savings Component and the Retirement Component. There’s also a third pot, called the Vested Component, which holds all your savings built up before 1 September 2024[3].

How the Pots Work

• Savings Component: One-third of your new contributions go here. You can withdraw from this pot once per tax year, with a minimum withdrawal of R2,000. This money is meant for emergencies, but remember, every withdrawal reduces your retirement nest egg. Withdrawals are taxed at your marginal tax rate, and you must be registered with SARS to access this money[1][6].
• Retirement Component: Two-thirds of your new contributions are locked away until you retire. This pot is designed to ensure you have a solid financial foundation when you stop working. You can’t access this money early, except in very limited circumstances.
• Vested Component: This pot contains all your retirement savings accumulated before 1 September 2024. The old rules still apply here—you can usually access this money if you resign or are retrenched. A once-off transfer of up to 10% of your vested balance (capped at R30,000) will move to your Savings Component to give you some emergency access[1][3].

Example: How the Pots Are Funded

Let’s say you have R100,000 in your retirement fund before 1 September 2024. When the new system starts, up to 10% (R10,000) of that amount can be transferred to your Savings Component. If you have R500,000, the maximum transfer is R30,000. After 1 September 2024, every new contribution is split: one-third to Savings, two-thirds to Retirement[1][3].

Why the Change?

The government wants to help you avoid cashing out your entire retirement savings when you change jobs or face a financial crisis. By allowing limited, taxed access to a portion of your savings, the system aims to reduce financial stress without wrecking your retirement plans[1][2].

How Retirement Annuities Work in South Africa (Specific SARS Regulations)

Retirement annuities (RAs) are a popular way to save for retirement, especially if you’re self-employed or your employer doesn’t offer a pension fund. Here’s how they work under the new rules:

• Tax Deduction: You can deduct up to 27.5% of your taxable income (capped at R350,000 per year) for contributions to retirement funds, including RAs, pension funds, and provident funds. This deduction reduces your taxable income, which can save you thousands in tax each year.
• Contribution Limits: The maximum you can contribute across all retirement funds is R350,000 per year for the tax deduction. You can contribute more, but the extra won’t get you a tax break.
• Access to Funds: With an RA, you can’t access your money until you’re at least 55. When you retire, you must use at least two-thirds of the fund to buy an annuity that pays you a monthly income for life. The rest can be taken as a cash lump sum, subject to tax.

SARS Deadlines and Compliance

To benefit from the tax deduction, make sure your contributions are made during the tax year (1 March to 28/29 February). Keep your proof of payment—SARS may ask for it. If you withdraw from the Savings Component of a retirement fund, you must be registered with SARS, and any tax owed will be deducted before you get your money[6]. If you have outstanding tax returns or owe SARS money, this will be deducted from your withdrawal.

Step-by-Step Retirement Planning Guide (With Real Examples)

Let’s walk through a practical example to show how the Two-Pot system works in real life.

Case Study: Thandi, Age 40, Salary R40,000 per Month

Thandi works at a Johannesburg tech company. She earns R40,000 a month (R480,000 a year) and contributes 15% of her salary to her employer’s pension fund. Here’s how her retirement planning looks under the new system:

• Annual Contribution: 15% of R480,000 = R72,000 per year.
• Tax Deduction: 27.5% of R480,000 = R132,000, but the cap is R350,000. Thandi’s full R72,000 contribution is deductible.
• Two-Pot Split: From 1 September 2024, R24,000 (one-third) goes to the Savings Component, R48,000 (two-thirds) to the Retirement Component.
• Emergency Access: Thandi can withdraw from the Savings Component once per tax year, minimum R2,000, taxed at her marginal rate.
• Retirement Access: The Retirement Component is locked until she retires. At retirement, she must use at least two-thirds to buy an annuity; the rest can be taken as cash (taxed according to retirement lump sum tables).

What If Thandi Changes Jobs?

If Thandi resigns, she can access her Vested Component (pre-1 September 2024 savings) as a cash lump sum, subject to tax. Her Savings and Retirement Components stay in the fund until she retires, preserving her long-term security.

Tax Benefits and Deductions (Exact Amounts and Calculations)

Let’s break down the tax benefits with clear calculations.

Tax Deduction Calculation

You can deduct the lesser of:

• 27.5% of your taxable income (from salaries, bonuses, etc.)
• R350,000 per year

Example 1: You earn R200,000 a year. 27.5% is R55,000. You can deduct up to R55,000 for retirement fund contributions.

Example 2: You earn R1,500,000 a year. 27.5% is R412,500, but the cap is R350,000. You can deduct up to R350,000.

This deduction reduces your taxable income, which means you pay less tax. For example, if you’re in the 36% tax bracket and you deduct R72,000, you save R25,920 in tax that year.

Tax on Withdrawals

Withdrawals from the Savings Component are taxed at your marginal tax rate. If you withdraw R20,000 and your marginal rate is 36%, you’ll pay R7,200 in tax, leaving you with R12,800 cash[1][6].

RA vs TFSA Comparison (Detailed Analysis)

Should you put your money in a retirement annuity (RA) or a tax-free savings account (TFSA)? Here’s a head-to-head comparison.

Feature	Retirement Annuity (RA)	Tax-Free Savings Account (TFSA)
Tax deduction on contributions	Yes, up to 27.5% of income (max R350,000/year)	No
Tax on growth	Taxed when withdrawn (retirement lump sum tax tables)	No tax on growth or withdrawals
Access before retirement	Very limited (only from Savings Component after 1 Sep 2024)	Anytime, but contributions limited
Annual contribution limit	No limit, but tax deduction capped at R350,000	R36,000 per year, R500,000 lifetime
Purpose	Retirement income	Flexible savings, emergencies, goals

Which Should You Choose?

If you want to reduce your tax bill and lock money away for retirement, an RA is a smart choice. If you want flexibility and tax-free growth for medium-term goals (like a house deposit or education), a TFSA is better. Ideally, use both: max out your RA for the tax break, then contribute to a TFSA for flexibility.

How to Choose the Right Retirement Product

Not all retirement products are the same. Here’s what to look for when comparing providers like Allan Gray, Coronation, Satrix, and EasyEquities:

• Fees: Look for low annual management fees. Even 1% extra in fees can cost you hundreds of thousands over 30 years.
• Investment Options: Choose a fund that matches your risk profile. Younger investors can afford more equity (shares) for growth; older investors may prefer more stable assets.
• Performance: Check long-term returns, not just the past year. Consistency matters.
• Flexibility: Some providers let you switch between funds or adjust contributions easily.
• Customer Service: Good support can save you time and stress.

Provider Comparison

Provider	Fees (approx.)	Key Features
Allan Gray	1.1% p.a.	Strong long-term track record, wide fund choice
Coronation	1.0% p.a.	Focus on quality assets, good retirement tools
Satrix	0.4% p.a.	Low-cost index funds, simple online access
EasyEquities	0.25% p.a. + trading fees	Cheapest, DIY investing, great for hands-on investors

Remember, fees compound over time. Paying 0.4% instead of 1.1% could mean an extra R500,000 at retirement on a R1 million investment over 30 years.

Common Retirement Planning Mistakes to Avoid

Here are some pitfalls to watch out for:

• Cashing out when changing jobs: This destroys your retirement savings. Rather preserve your fund or transfer it to a new employer’s fund or an RA.
• Not claiming your tax deduction: Always submit your RA contribution certificate to SARS.
• Underestimating fees: High fees eat into your returns. Compare carefully.
• Ignoring the Two-Pot rules: Understand how the new system affects your access and tax.
• Not reviewing your plan regularly: Life changes. Review your retirement strategy at least once a year.

How to Get Started (Specific Steps and Providers)

Ready to take control of your retirement? Here’s what to do:

1. Check your current retirement savings: Log in to your pension or provident fund portal. See how much you have in the Vested, Savings, and Retirement Components.
2. Decide how much to contribute: Aim for at least 15% of your salary, but more is better if you can afford it.
3. Choose a provider: Compare Allan Gray, Coronation, Satrix, and EasyEquities for fees, performance, and features.
4. Open an RA or TFSA: You can do this online in minutes. Start small if you need to—even R500 a month adds up over time.
5. Submit your tax documents: Give your RA contribution certificate to your accountant or upload it via SARS eFiling.
6. Set up automatic contributions: Automate your savings so you don’t have to think about it.
7. Review annually: Check your progress, adjust your contributions, and rebalance your investments if needed.

Conclusion with Clear Next Steps

The Two-Pot retirement system is a game-changer for South African workers. It gives you more flexibility in emergencies but still protects your long-term security. The 27.5% tax deduction (up to R350,000) is a powerful incentive to save, and the new TFSA rules offer tax-free growth for other goals.

To make the most of these changes:

• Don’t cash out your retirement savings when you change jobs. Preserve or transfer your fund.
• Max out your RA contributions to get the full tax benefit.
• Consider a TFSA for flexible, tax-free savings.
• Choose low-fee providers like Allan Gray, Coronation, Satrix, or EasyEquities.
• Review your plan every year and adjust as your life changes.

Retirement might feel far away, but the choices you make today will shape your future. Start now, keep learning, and don’t be afraid to ask for help from a certified financial planner. Your future self will thank you.