By Keith Peter Advice Manager at Old Mutual Advice
With the launch of the Two-Pot Retirement System less than 100 days away, financial advisers must prepare for this significant shift in retirement savings. This system, set to commence on 1 September 2024, offers more flexible access to retirement funds, but it demands careful consideration, especially for clients aged 55 and over.
Understanding the Two-Pot System
The Two-Pot Retirement System divides retirement contributions into two distinct pots: one-third for savings accessible before retirement and the remaining two-thirds only accessible at retirement (to purchase an annuity). This new approach aims to provide better tax efficiency and income stability. However, it presents unique challenges, particularly for individuals nearing retirement age.
For clients who were 55 years old as of 1 March 2021 and members of the same provident fund, the new system offers a choice: they can remain within their existing structure, their contributions will continue to be allocated to the provident fund vested component, and they will be able to access up to 100% of their benefit in cash at retirement, or switch to the new system. This decision requires careful analysis and tailored advice to ensure it aligns with the client’s long-term financial health.
The Risks of Premature Withdrawals
One critical aspect advisers must highlight is the risk associated with premature withdrawals from the savings pot. Withdrawals before retirement can lead to significant tax burdens, as these are taxed at the client’s marginal tax rate, compared to the more favorable retirement tax tables. Additionally, early access to funds means missing out on the power of compound growth.
Consider a scenario where a 55-year-old client plans to retire at 60 with a current pension fund valued at R1,000,000. The client allocates R24,000 to the savings pot and R48,000 to the retirement pot (with a 6% annual contribution increase and an 8% annual growth rate for the pension fund).
By withdrawing from the savings pot annually, the total retirement fund value at age 60 would be R1,765,066. Without withdrawals, the value increases to R1,979,023 – a difference of over R200,000. This excludes the tax payable on the annual withdrawals.
Consistency and Long-Term Planning
Advisers should emphasise the importance of maintaining a consistent financial strategy. Often, the best approach is to adhere to the client’s established plan, avoiding premature access to the savings pot whenever possible. This cautious approach helps safeguard the capital accrued over their working lives, ensuring a stable financial future.
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Regular reviews and adjustments are necessary to address any shortfalls while investing in conservative to moderate funds. Each client’s unique circumstances—specific financial needs, aspirations, and retirement goals—should dictate tailored advice, ensuring a personalised and practical approach to navigating the new system.
Bridging the Knowledge Gap
A recent Old Mutual survey revealed that half of the independent financial advisers feel ill-equipped to advise their clients effectively on the Two-Pot Retirement System. This highlights an urgent need for enhanced education and support for advisers, ensuring they are fully prepared for this landmark shift in retirement planning.
Resources and Continuous Learning
Financial institutions are taking proactive steps to bridge this knowledge gap. Workshops, master classes, and regular articles are being rolled out to explain the intricacies of the Two-Pot Retirement System. Business consultants play a pivotal role in supporting independent advisers through this transition.
Advisers can also access detailed information from various online platforms, including the National Treasury and SARS, which offer valuable FAQs and documents. Industry bodies like the Financial Planning Institute and ASISA provide further educational opportunities through webinars, ensuring advisers can offer sound advice and navigate these regulatory changes effectively.
Tax Implications and Strategic Planning
Understanding the tax implications of the Two-Pot Retirement System is crucial. Withdrawals from the savings pot are treated as income and taxed at the client’s marginal tax rate, while contributions and growth remain untaxed until benefits are withdrawn. Advisers must help clients strategise effectively, optimizing the timing and amount of withdrawals to minimize tax liabilities and maximise retirement income.
Staying Informed and Collaborative Learning
Independent advisers face the challenge of navigating a deluge of information from multiple sources. Establishing a structured plan for professional development, such as attending key industry events, subscribing to essential publications, and conducting regular check-ins with legal advisers, can prevent information overload. Collaboration with colleagues to share insights from different events can further enhance learning and understanding within the professional community.
Conclusion – As we approach the launch of the Two-Pot Retirement System, financial advisers must be well-prepared to guide their clients through this significant change. By emphasising the risks of premature withdrawals, maintaining consistency in financial planning, and leveraging available resources, advisers can help clients make informed decisions that secure their financial future.
Together, we can navigate this new era of retirement planning, ensuring that clients achieve the financial stability they deserve.