# How the Two-Pot Retirement System Tax Rates Apply to Emergency Withdrawals

South Africa implemented the Two-Pot retirement system on 1 September 2024, enabling fund members to access a portion of their retirement savings before reaching retirement age without having to resign from employment. Uptake was immediate: by January 2025, more than 2.4 million South Africans had applied for withdrawals from their Savings Components, totaling R43.4 billion in payouts. However, the tax mechanics and administrative costs linked to these early withdrawals caught many taxpayers by surprise.

## Structure of the Two-Pot System

Under the reform, all new retirement contributions made from 1 September 2024 onward are split into two main pools:

– **Savings Component:** One-third of new contributions is directed here. Funds in this component are accessible prior to retirement.
– **Retirement Component:** Two-thirds of new contributions is allocated here and remains locked until retirement.

Savings accumulated before 1 September 2024 remain in a **Vested Component**, which operates under pre-existing retirement rules.

To seed the new system, a once-off transfer took place on 1 September 2024. Ten percent of a member’s pre-existing savings, capped at a maximum of R30,000, was moved into the Savings Component.

### Access Rules and Restrictions

Members can withdraw from the Savings Component once per tax year (running from 1 March to 28 February), provided the withdrawal amount is at least R2,000.

Conversely, funds in the Retirement Component cannot be accessed before retirement. At retirement, the full balance in the Retirement Component must be used to purchase an annuity. The only exception to this mandatory annuity purchase is if the total combined value across all three components (Savings, Retirement, and Vested) is below R165,000.

## Marginal Tax Rates vs. Lump-Sum Tables

A critical factor in pre-retirement withdrawals is how the South African Revenue Service (SARS) taxes the payout. Savings Component withdrawals are **not** taxed using the preferential retirement lump-sum tax tables that apply at retirement or fund termination.

Instead, SARS taxes Savings Component withdrawals at the member’s personal marginal income tax rate. Payouts are treated as taxable income and added to your earnings for the tax year.

For the 2026/2027 tax year, SARS progressive marginal tax brackets are 18%, 26%, 31%, 36%, 39%, 41%, and 45%.

Because withdrawals are taxed progressively alongside regular earnings, higher-income taxpayers in the top brackets lose up to 45% of their withdrawal directly to tax. Middle-income earners typically face tax rates between 26% and 36%, reducing the cash amount actually received.

## Tax Directives, Debts, and Administration Fees

To make a withdrawal, a member must be registered for tax with SARS. The withdrawal process involves several financial checks:

1. **Tax Directive:** The fund administrator requests a tax directive from SARS. SARS calculates the tax owed based on the member’s declared annual income.
2. **Outstanding SARS Debt:** If the member has any outstanding tax debt, SARS instructs the fund administrator to deduct that debt directly from the withdrawal amount before paying out the balance.
3. **Administrator Fees:** Fund administrators charge a processing fee for executing the withdrawal. These fees typically range between R250 and R345 including VAT, depending on the fund manager. Members should verify exact fee amounts with their specific administrator.

### Year-End Tax Adjustments

The tax withheld at payout is based on estimated annual income at the time of the directive. If a taxpayer’s actual annual income differs when SARS completes its annual tax assessment, the final tax liability may change. Taxpayers who understate their annual earnings during the directive application risk facing additional tax payments and penalties when SARS reconciles their annual return.

## The Cost of Lost Compound Growth

Beyond immediate tax withholding and processing fees, early withdrawals carry a long-term cost in lost compound interest. Money removed from the Savings Component forfeits potential investment growth over the remaining years until retirement.

Assuming an illustrative nominal annual return of 10%:

– **R10,000 withdrawal at age 35:** Results in approximately R174,000 in foregone retirement value over a 30-year period.
– **R30,000 withdrawal at age 35:** Reduces final retirement savings by approximately R325,000 over 25 years.
– **R30,000 left invested:** A R30,000 sum left untouched in the fund for 10 years could grow to approximately R77,000.

While actual fund returns vary depending on market conditions and asset management—and past performance does not guarantee future results—these illustrative figures highlight the compounding trade-off inherent in accessing retirement funds early.