Lizl Budhram, Head of Advice at Old Mutual Personal Finance
Local financial advisers have another opportunity to demonstrate the value of their advice as they guide customers through National Treasury’s two-pot retirement funding system, which goes ‘live’ from 1 March 2024.
From that date, South African savers will potentially have greater and more frequent access to a portion of their retirement savings than previously – and financial advisers will have their work cut out to ensure that customers stay on track with their long-term, holistic financial plans.
What financial advisers need to know about the two-pot system
“Treasury is introducing a two-pot system to address the issue of employees resigning from their jobs to get early access to the accumulated capital in their provident or pension funds – this, in turn, mitigates against the capital depletion that leaves retirement fund members with too little money to ensure a sustainable income in retirement,” says Lizl Budhram, Head of Advice at Old Mutual Personal Finance.
The current retirement saving dispensation differentiates between employer or occupational funds (provident and retirement funds) and retail retirement funds (retirement annuities) with tough legislation in place to ensure capital preservation until retirement age.
Members of employer funds and retirement annuities can only access their accumulated capital when they reach their retirement age or become disabled or die. The exception to this rule is that employer fund members can withdraw all their capital when changing jobs and resigning from the employer fund. This withdrawal has both short-term tax consequences and a longer-term financial impact.
From 1 March 2024, Treasury will require the administrators and providers of all employer fund and retirement annuities to split and separately account for fund members’ capital and contributions. The current accumulation, or the member’s capital balance on 1 March 2024, plus any growth on that amount going into the future, is referred to as the vested balance, which is treated per the current legislation. All new contributions into the fund will then be split into a retirement pot (two-thirds of contribution) which cannot be accessed until retirement age, and a savings pot (one-third of contribution), which will be accessible annually subject to new rules.
“We have already taken steps to ensure that our advisers are informed about the changes and are able to advise their customers on these during their frequent customer reviews,” Budhram says. The financial services giant favours advice rooted in the principle that early access to your retirement funding capital can have a negative impact on your long-term retirement provisioning, it should only be accessed if there is an absolute financial emergency.
Product providers are concerned that the legislative changes – and the levelling of playing fields between employer funds and retirement annuities – could prove tempting for retirement annuity customers. “In the past, the capital in retirement annuities was secure until age 55; from 1 March 2024 customers in these products will have emergency access to up to one-third of their retirement contributions on an ongoing basis,” Budhram says.
Helping customers navigate the pending two-pot changes
One of the first steps when advising customers on the pending two-pot changes is to get a clear view of their overall retirement funding portfolio. “An adviser will have to deal with customers that belong to a variety of retirement annuities and / or an employer fund. These various funds may have their own way of implementing the two-pot changes. Therefore, advisers will need to understand how each employer fund is going to approach the change,” says Budhram.
Providing guidance on financial decision making
Financial advisers must also consider how the change might impact their customer’s financial decision making. To do so, advisers should remind their customers of the reason for contributing to a retirement fund in the first place, being that it is a tax effective tool to maximise the capital available to them at retirement. There are two clear messages to share with customers: First, early withdrawal puts your retirement plan at risk; and second, early access to your savings ‘pot’ is for emergencies only!
Preparing your customers in advance
Getting customers to make changes to their financial behaviour usually takes more than one adviser-customer interaction.
“Advisers should already begin preparing their customers for what to expect when the two-pots system goes ‘live’ because delaying the conversation until March 2024 will not leave enough time for them to help customers with their approach,” concludes Budhram.