By: Keith Peter, Advice Manager at Old Mutual Personal Finance
With the introduction of the Two-Pot Retirement System due on 1 September 2024, financial advisers are gearing up for significant changes to retirement savings. However, the new system, which allows for more flexible access to retirement funds, demands careful consideration, especially for customers aged 55 and over.
It’s important for older fund members to be cautious. Introducing the two-pot system is a pivotal moment for individuals over 55. With only a few short years until retirement, they must carefully manage their contributions to secure a stable financial future. The system divides retirement contributions into two pots: one-third for savings that can be accessed before retirement and another for funds only accessible at retirement. The Two-Pot Retirement System provides specific provisions for individuals who were 55 years old as at 1 March 2021, and members of the same provident fund.
From 1 September this year, these individuals can choose to remain under their current system, which allows for a 100% cash withdrawal of all funds saved before 1 March 2021 when they retire. Alternatively, they can opt for the new system, which could provide better tax efficiency and income stability.
It’s crucial that advisers comprehensively understand their customers’ needs and encourage them to make informed decisions.
Withdrawals only for emergencies
Whatever option the customer chooses, we advise against premature withdrawals from the savings pot, because of the tax implications and the potential reduction in retirement income. Accessing funds early could lead to a significant tax burden, as withdrawals will be taxed at the marginal rate, whereas funds accessed upon retirement receive more favourable tax treatment under the retirement tax tables. They will also miss out on the power of compound growth on the funds in the savings pot.
Consider a 55-year-old customer planning to retire at 60 with a current pension fund valued at R1 000 000 as of the 31 August 2024. The customer’s monthly pension contributions total R6 000, or R72 000 annually, with R2 000 (R24 000 annually) allocated to the savings pot and R4 000 (R48 000 annually) to the retirement pot. We will factor in a 6% annual contribution increase and an 8% growth rate for the pension fund.
On 1 September 2024, the customer’s savings pot will hold R30 000, the lesser of R30 000 or 10% of the total pension fund value. Consequently, the vested pot, representing the remaining balance after the savings pot allocation, will be R970 000 (R1 000 000 minus R30 000).
If the customer withdraws from the savings pot annually, including the initial seeding capital, the total value of the retirement fund at age 60 will be R1 765 066. If the customer does not withdraw from the savings pot, including the seeding capital, the total value of the retirement fund at age 60 will be
R1 979 023 – a difference of over R200 000.
Consistency is the key
Financial advisers should emphasise stability and adherence to their customers’ established financial plans when guiding them through the Two-Pot Retirement System. Often, the best approach is to maintain their current strategy and avoid prematurely accessing the savings pot.
This helps safeguard the capital they have accrued over their working lives. Financial advisers should review customers’ plans annually, adjusting only as needed to address any shortfalls while continuing to invest in conservative to moderate funds. This strategy ensures that the investment growth remains steady, albeit not explosively high, thus securing the necessary funds for a comfortable retirement. Furthermore, each customer’s unique circumstances – such as their specific financial needs, aspirations and retirement goals – should dictate tailored advice, ensuring that advisers provide personalised and practical guidance through the intricacies of the new retirement system.
Resources and continuing education for advisers
The new system presents both challenges and opportunities. For advisers, this is a chance to deepen customer relationships and improve financial outcomes for retirees. Ample resources are available to support financial advisers through the transition to the Two-Pot Retirement System. Extensive information is provided by fund administrators, insurance companies and asset management firms, and continuous education through webinars and updated resources are recommended.
Advisers can access detailed information by searching “Two-Pot Retirement System” online, and platforms like the National Treasury and SARS offer valuable FAQs and documents. Additionally, industry bodies such as the Financial Planning Institute and the Association for Savings and Investments South Africa (ASISA) provide further educational opportunities.
