The two-pot habit that’s quietly undermining reforms

When South Africa’s two-pot retirement system came into effect in September 2024, it represented one of the most significant reforms to the country’s retirement savings framework in decades. The objective was straightforward: preserve more retirement savings while recognising that many South Africans face genuine financial emergencies before retirement.

Under the new system, one-third of new retirement contributions flow into a savings pot, which can be accessed before retirement, while the remaining two-thirds are preserved until retirement. Members may make one withdrawal from their savings pot per tax year, provided the withdrawal is at least R2,000.

Access, however, is not free or immediate. Most administrators charge a significant processing fee and can take up to two weeks to process requests. Withdrawals are also taxed at the member’s marginal income tax rate, meaning the amount received can be substantially less than expected – particularly for higher-income earners. 

According to Alexforbes, 96% of claimants understood that their withdrawals would reduce their retirement savings, and an equal 96% were actively aware of the tax implications. The issue is not a lack of awareness, but rather the shock of the calculation. Because withdrawals are taxed at the member’s marginal PAYE rate – and any arrear taxes owed to the South African Revenue Service (Sars) are deducted first – the final payout is often considerably less than the headline withdrawal amount.

By the time Sars commissioner Edward Kieswetter addressed the Sanlam Benchmark event in June 2025, the sheer scale of the system’s uptake was clear. Retirement fund members had made nearly 4-million withdrawals totalling roughly R57bn, generating about R15bn in tax revenue. The overall blended average was about R14,250, but industry data reveals a sharp divide. First-round withdrawals in 2024 typically averaged R14,000-R20,000; repeat withdrawals in the new tax year dropped significantly to roughly R4,600-R6,000 as available balances shrank.

Treated like a ‘13^th cheque’

Those figures tell an important story.

The average withdrawal is not large enough to suggest lavish spending. Instead, survey findings consistently indicate that withdrawals are primarily used to meet immediate financial obligations: settling debt, paying school fees, financing vehicle purchases or deposits, and covering day-to-day living expenses. In many cases, the savings pot has served as an emergency financial buffer amid persistently high living costs and stagnant wages.

Viewed through this lens, it would be difficult to argue that the policy has failed. It has provided millions of South Africans with access to funds precisely when they needed them most.

But there are warning signs that deserve equal attention.

One of the more concerning findings comes from Momentum, which reported that 95% of members making withdrawals in the 2027 tax year were doing so for the second or third time. Sanlam’s equivalent figure was 75% repeat withdrawals in the 2026 tax year. 

This suggests that, for many households, the savings pot is no longer being reserved for genuine emergencies. Instead, it risks becoming a recurring source of annual income, a “13^th cheque”, if you will.

That behavioural shift matters. The two-pot system was never intended to create an annual spending account. It was designed as a compromise between complete preservation and unrestricted access. If members begin to budget around regular withdrawals, retirement savings gradually become another income stream to support current consumption rather than future financial security.

Focus on financial literacy

Academic research reinforces this concern. Studies have found that while awareness of the two-pot system is generally high, understanding of its long-term consequences remains limited. Many members know they can withdraw, but far fewer appreciate what repeated withdrawals mean for compound investment growth and retirement adequacy decades later.

Financial literacy, therefore, remains one of the biggest challenges facing the reform. Education should focus not only on the tax implications but also on helping people quantify the long-term opportunity cost. A withdrawal of R10,000 today is not merely R10,000 less at retirement; over 20 or 30 years of investment growth, it could represent many multiples of that amount in lost retirement capital.

At the same time, it would be a mistake to judge the success of the reform solely by the volume of withdrawals.

The more encouraging statistic is that roughly six in 10 eligible members have chosen not to withdraw from their savings pot. Amid headlines about billions withdrawn, this quieter majority often goes unnoticed. Preservation is, in fact, proving more common than withdrawal.

This is significant because it represents a marked departure from South Africa’s previous retirement landscape. Before the two-pot reforms, workers changing employers (on average every three years, according to Pnet’s 2024 jobs report) could access 100% of their accumulated retirement savings. Cashing out when changing jobs became commonplace, with lasting consequences for long-term retirement outcomes.

There is an upside

The preservation component of the new system fundamentally changes that dynamic. Even if every eligible member were to make an annual savings-pot withdrawal, modelling by Discovery Corporate & Employee Benefits suggests that total retirement assets could still exceed R150-trillion over the long term, which would likely be three times higher than without the two-pot reform.

That is indeed a positive improvement. It reminds us that the success of the two-pot system should not be measured by whether people withdraw money, but by whether substantially more retirement capital remains invested over decades than would have been the case under the old rules. The challenge now is not to reverse the reform, but to strengthen it.

Government, retirement funds, employers and financial institutions all have a role to play in improving financial education, clearly communicating the tax treatment of withdrawals, and helping members distinguish genuine emergencies from routine consumption. Simple tools that illustrate the future value of money withdrawn today could meaningfully improve decision-making.

South Africa’s two-pot system was never going to eliminate financial hardship. Nor was it designed to stop every withdrawal. Rather, it sought to balance today’s financial realities with tomorrow’s retirement needs.

So far, the evidence suggests it is doing exactly that. Millions have gained access to much-needed financial relief, while preservation rates remain stronger than many feared. The task ahead is ensuring that the savings pot remains what it was intended to be: a safety net for exceptional circumstances, not an annual supplement to household income.

If South Africa can achieve that balance, the two-pot reform may ultimately be remembered not for the billions withdrawn, but for the trillions preserved.

Thomas Brennan is a co-founder of Franc, a South African fintech company that helps people invest easily and affordably.

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