New Two-Pot Retirement System is an excellent opportunity, but financial advisers are crucial to guiding customers

In a world where the sands of financial security are ever-shifting, South Africa is poised to take a monumental step towards safeguarding the golden years of its citizens. Picture this: a future where retirement planning is not just a passive activity but a dynamic strategy that can adapt to the ever-changing tides of personal needs and market fluctuations.

As the clock ticks closer to the effective date, financial advisers find themselves on the cusp of a transformative era in retirement planning – the advent of the Two-Pot Retirement System. Steering through this new landscape will demand expertise and a nuanced understanding of each customer's journey towards retirement. Amid opportunities and potential pitfalls, advisers are the beacon of wisdom, equipped to guide customers towards making choices that foster long-term stability without sacrificing immediate needs.

Evidence of prudent, insightful decision-making will be required when drawing up a retirement game plan that takes account of both the opportunities and drawbacks that await customers. This will involve cataloguing all the risks that could present themselves when customers sign off on their respective retirement plans.

Understanding the consequences

Before introducing the new scheme, the adviser must ensure that the rationale for the proposed Two-Pot Retirement System is clearly outlined to each customer. Customers must understand the consequences of making ill-informed and reckless choices. This, in particular, relates to premature access to the savings pot without fully understanding the negative trickle-down effect on the customer's retirement bottom line. Customers need to understand that accessibility comes with inherent risks if they are tempted to access savings without understanding the impact it will have on their long-term goals.

Advisers should note that emergencies may necessitate tapping into these savings, but doing so could seriously erode retirement benefits later on when preservation matters most. The essential advice is that accessing retirement savings prematurely jeopardises the entire retirement plan. When circumstances warrant access to the savings pot, this decision must be carefully considered, alternative financial strategies explored, and the long-term implications understood.

The consequence of withdrawing funds prematurely should be illustrated with examples to show the potential impact on the plan. The tax payable on withdrawals should also serve as a deterrent. The following example illustrates how accessing savings prematurely can have a significant financial impact on a retirement plan.

Cindy is 29 years old and is a member of two retirement annuities, each with a value of R300 000 on 1 March 2024. She decided to withdraw R25 000 x 2 to fund a great travel deal to celebrate her 30^th birthday. If we ignore future contributions, the difference this will make to Cindy's retirement fund at age 65 looks like this:

• R550 000 invested at 10% return over 35 years = R15 456 340.
• R600 000 invested at 10% return over 35 years = R16 861 462.
• This is a R1 405 122 difference in the retirement capital at age 65. In current value, that equates to R 131 607.
• Cindy is depleting her retirement savings to access the R50 000 now.
• After-tax (assuming a tax rate of 30%), this will only give her R35 000 in her pocket.

The benefit of preservation in the retirement pot will only manifest over the longer term. In this instance, it is recommended that the adviser suggest a segmentation customer communication strategy. The well-educated would need minimal intervention to be prepared for the advent of the Two-Pot Retirement System. In contrast, another customer might need the above example or a newsletter or web link to help create awareness and understanding of what is in store for them on their retirement horizon. Customers who don't have a substantial savings discipline and are struggling financially would need help to decide whether accessing any part of the savings pot was in their best interests immediately or in the long term.

The new system aims to help South Africans secure a more stable retirement. Customers should consider setting up dedicated emergency funds rather than using retirement annuities as contingency savings. Advisers must emphasise the importance of long-term planning over short-term indulgence. Access should be carefully considered in a detailed consultation between the customer and the adviser. All alternative financial strategies should be considered, along with a plan to replenish the withdrawn funds in the future.

Time frame presents challenges

Financial advisers will not always find it easy to explain the Two-Pot Retirement System to existing customers. On the face of it, the changes may appear simple, but they may have more complex consequences for specific customers, like provident fund members, some of whom will have a choice in whether to have Two-Pot Retirement System rules apply to their fund. 

Since the deadline for the new system is relatively close, there is a rush across the industry to be ready in time. For example, exactly how SARS will implement and apply the tax on withdrawals is not yet known. It is also essential for advisers to stay up-to-date with information from retirement fund administrators and product providers. They will have had to develop cohesive responses for customers to make sound and informed decisions on critical questions concerning Accessibility and Preservation in Retirement Planning.

The introduction of the Two-Pot Retirement System will provide advisers with the opportunity to offer customers a stable new plan for retirement. It will also provide an invaluable retirement dashboard for customers to stay on track if satisfied that their well-crafted and robust retirement plans will stand the test of time.

The need for wise counsel

Customers not disciplined at saving will need extra support to ensure they don't succumb to temptation with the new accessibility in the Two-Pot Retirement System world. For those battling financial pressure and not making ends meet, advisers should help them decide whether accessing any part of the savings pot would be in their best interests immediately or in the long term.

For most customers, making provision for retirement is an easy choice because the aim is to accumulate sufficient savings for retirement. Any option which provides early access to these savings will put the retirement plan at risk. So, the advice to customers should be to try not to access these funds; the fact that they can access them does not mean they should. Of course, this does not mean the savings pot should never be accessed. There are certain circumstances where access would be warranted – but only after a carefully considered, detailed consultation between the customer and adviser.

It is also essential for advisers to stay up-to-date with the information provided by retirement fund product providers to understand how future withdrawals from savings pots will impact adviser remuneration and incentives.

In this context, the role of the adviser has never been more pivotal. As the guardians of financial well-being, they are equipped to lead customers through the intricacies of the Two-Pot Retirement System, offering compassionate and informed guidance. Through careful consultation and collaboration, advisers can help forge resilient, flexible plans tailored to each individual's unique financial landscape.

With the proper guidance and a spirit of collaboration, there is every reason to believe that the road ahead is paved with opportunities for growth and prosperity. The Two-Pot Retirement System beckons a promising horizon, where the dreams of a secure and fulfilling retirement are not just a possibility but a tangible reality within reach for all South Africans.