What is the two-thirds annuitisation rule?

When an individual retires in South Africa, the law restricts how much of their retirement savings can be withdrawn as a single cash lump sum.

The core rule allows a maximum of one-third to be taken in cash. The remaining two-thirds is legally required to fund a regular monthly pension. However, specific exemptions exist for very small fund balances and older provident fund savings.

The standard one-third and two-thirds split

For decades, the standard framework for pension funds and retirement annuities has dictated a specific split at the retirement date.

A retiring member is permitted to withdraw up to one-third of the accumulated money as a cash lump sum. The remaining two-thirds cannot be taken in cash. Instead, it is directed to a life insurer or investment platform to purchase an annuity.

An annuity acts as a replacement paycheck. There are two main types: a guaranteed annuity (which pays a set, guaranteed amount for life) and a living annuity (where the retiree chooses how the money is invested and selects a yearly withdrawal rate).

The core objective of annuitisation is to convert a large block of capital into a steady pension, preventing a scenario where a retiree spends their entire life savings at once.

The R360,000 full-commutation exception

The government recognises that enforcing the two-thirds rule on very small retirement balances creates a practical problem. Two-thirds of a small amount buys a monthly income so low that administrative fees consume a large portion of the value, leaving the retiree with an unhelpful trickle of cash.

To address this, the Income Tax Act includes a "de minimis" rule — often called full commutation. If the total value of a person's retirement fund is R360,000 or less at the time of retirement (raised from R247,500 with effect from 1 March 2026), the annuitisation rule is waived entirely. The member is allowed to withdraw the full 100% as a single cash lump sum.

This R360,000 threshold applies per fund. For example, a taxpayer with three separate retirement annuities at different providers, each valued at R200,000, is permitted to cash out all three in full because no single fund exceeds the statutory limit.

How the Two-Pot system changes the maths

On 1 September 2024, the Two-Pot retirement system shifted how the split operates for new contributions. Instead of performing the one-third calculation at the retirement date, the system splits the money automatically as it enters the fund.

Savings Pot (one-third): this pot receives one-third of all new contributions. At retirement, whatever is left in this pot can be taken entirely in cash.
Retirement Pot (two-thirds): this pot receives two-thirds of new contributions. At retirement, this pot is strictly for annuitisation — meaning 100% of it buys a pension income, with zero cash available.
Vested Pot: this pot holds everything saved before 1 September 2024. When the member retires, the traditional rule still applies to this money: up to one-third in cash, and the rest to an annuity (unless the R360,000 exception applies).

The T-Day provident fund exception

Before 1 March 2021 (known as T-Day), provident funds operated differently from pension funds, allowing members to take 100% of their savings in cash at retirement.

The law was changed to align provident funds with the standard annuitisation rule, but older savings were protected. Money saved in a provident fund before 1 March 2021, along with all the subsequent investment growth on that money, retains a "vested right." That specific portion can still be taken entirely as cash.

Furthermore, members who were 55 or older on 1 March 2021 and remained in the same provident fund are entirely exempt from the annuitisation rules. Their entire provident fund balance is accessible as a 100% cash lump sum when they retire.

Taxing the cash versus the monthly income

The cash lump sum and the monthly annuity income are taxed under entirely separate frameworks by SARS.

Any cash withdrawn at retirement — whether it is the standard one-third portion, a full commutation under the R360,000 rule, or a withdrawal of the entire Savings Pot — is taxed according to the retirement lump-sum tax table. Under the 2026/27 rates, the first R550,000 of a person's lifetime retirement lump sums is taxed at 0%. Amounts exceeding that threshold are taxed in escalating brackets of 18%, 27%, and a maximum of 36%.

This R550,000 zero-percent band is a lifetime limit, not an annual one. All retirement lump sums taken across a person's life are aggregated to check against this threshold.

The ongoing monthly income paid out by the annuity, on the other hand, is treated exactly like a monthly salary. The administrator deducts PAYE according to the standard personal income tax brackets before paying the net amount into the retiree's bank account.

Terms used on this page

retirement annuity (RA): A private retirement savings product used by people who are self-employed or who want to top up a workplace pension.
annuity: A financial product that pays out a regular income stream, typically used to provide a monthly pension during retirement.
guaranteed (life) annuity: A retirement income product where an insurer pays a set income for the rest of your life in exchange for the pot. No market risk to you — but the capital is spent, and the income generally stops at death unless structured otherwise.
living annuity: A retirement income product where the pot stays invested and you choose a yearly drawdown between 2.5% and 17.5%. The income isn't guaranteed — the pot can run out.
annuitisation: The process of converting a lump sum of retirement savings into an annuity that provides a regular pension income.
commutation: Exchanging a portion or all of a future regular pension income for an immediate upfront cash lump sum.
Savings Pot: The component of a retirement fund under the Two-Pot system that receives one-third of new contributions and can be accessed once per tax year before retirement.
Retirement Pot: The component of a retirement fund that receives two-thirds of new contributions and is strictly locked until formal retirement, when it must be used to buy an annuity.
vested pot: Retirement savings built up before 1 September 2024. The old rules still apply to it — the two-pot withdrawal rules don't touch it.
T-Day: 1 March 2021, the date the South African government harmonised the annuitisation rules for pension and provident funds.
Pay-As-You-Earn (PAYE): A system where an employer deducts income tax directly from an employee's salary and pays it to SARS every month.

Sources

Reviewed July 2026

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