In a country where the savings rate is very low and only about 6% of South Africans can afford to retire and maintain their current lifestyle, the two-pot retirement system was a major development for South Africa.
Since launched in September 2024, it’s made headlines for the amount of money withdrawn and the reasons people accessed the available funds.
Now that the initial frenzy has died down and a new withdrawal window is set to open in the new tax year in March, it’s important to consider whether it’s beneficial to use the available funds and how to get the most from any withdrawal.
Understanding the Two-Pot System
The two-pot system was designed to solve a uniquely South African problem, where more than 90% of fund members opt to cash out their full retirement benefit upon leaving formal employment.
Historically, many people would resign from their jobs just to access their pension payouts to cover debt or emergencies. This led to a cycle of starting from scratch every time someone changed jobs.
These trends mean that people reaching retirement typicallu have substantially less money saved to sustain them, which increased reliance on government grants.
Under the two-pot system, retirement contributions are split as follows:
- Savings pot: One-third of monthly contributions to a retirement fund will go into a savings pot, which investors can withdraw at any time, provided there is at least R2000 saved.
- Retirement pot: Two-thirds of their contributions go into a retirement pot, which investors cannot access until retirement.
- Vested component: All the contributions made to a fund up to 31 August 2024, which are untouchable.
Essentially, the two-pot system aims to give individuals in financial distress some flexibility to access a portion of their savings without forcing them to resign or retire while also promoting the long-term preservation of retirement savings.
SA’s Two-Pot Spending Spree
When the system launched in September 2024, South Africans surpassed all industry expectations when in terms of the pace and scale of withdrawals.
In the first two months, two-pot retirement withdrawals exceeded R25 billion, and by June 2025, South Africans had taken out a total of approximately R57 billion, according to SARS.
While the system was designed for “financial distress,” studies by FNB, Old Mutual, and the Bureau of Market Research (BMR) show a mixed bag of how that cash is being used:
- The Essentials: 48% of people used the funds for day-to-day living expenses, and 30% put it toward education costs.
- The Debt Trap: 46% used it to settle debt, like retail accounts, cell phone bills, and school fees.
- Upgrades: Interestingly, the BMR saw a spike in used car registrations, suggesting some used their withdrawals for vehicle deposits.
- Discretionary spending: About 23% of users (mostly younger investors) spent the cash on lifestyle items, such as holidays or new appliances.
To Spend or to Reinvest?
If you’ve already made a two-pot withdrawal, or you’re eligible for one, you might be tempted to treat it like a financial windfall, such as a bonus.
While there is benefit to paying down debt – especially short-term debt that attracts the highest interest rates – the best move for your long-term financial health is to leave the money invested, or reinvest what you take out. Here’s why…
- The Tax Man Takes a Big Cut
When you take a pension payout reinvestment, and turn it into cash, it is taxed at your marginal tax rate. If you’re in a mid-to-high tax bracket, SARS could take 25%, 35%, or even 45% of your withdrawal. If you leave it in your fund, that money grows tax-free.
- The Magic of Compounding
Every R1,000 you take out today isn’t just R1,000. It’s the thousands of rands in growth you would have earned over the next 20 or 30 years (or longer). Withdrawing early is essentially “borrowing” from your future self at a very high interest rate.
- Better Retirement Outcomes
By choosing a two pot withdrawal reinvestment strategy, where you either leave the money in your Savings Pot to grow or move it into another investment, you are vastly improving your chances of retiring with enough money to sustain your lifestyle.
Making The Two-Pot Call
If you don’t have a financial emergency, the smartest thing to do with your two-pot savings is to leave it invested – just because you can access the funds doesn’t mean you should.
If you’ve already withdrawn funds, consider replacing what you took out or investing the money elsewhere.
