Financial advice, discipline key in the emerging two-pot paradigm

If you have not yet figured out what will happen to your clients’ retirement savings from 1 September 2024, then you only have yourself to blame. While trawling his inbox for content ideas, your writer tripped-up over countless two-pot retirement solution explainers and reminders, most of which were supported by creative infographics. You might even give two-pots an award for ‘most infographics ever created by regulation’ or similar.

Two pots using three simple graphics

Your writer has seen an assortment of diagrams used to illustrate the administrative slice-and-dice that will occur at the end of August, ranging from 3D cooking pots two 2D images of hands and safes. Ironically, all of the two-pot solution ‘pics’ have had to use three images. As explained before, the two-pots solution actually involves three pots including your existing retirement fund account on 31 August, called the vested pot, and two new pots created from 1 September and labelled savings pot and retirement pot. PS, to be correct, you should probably replace ‘pot’ with component, being how the legislation describes it. 

And now for some good news: the solution explainers appear to be consistent across the product provider and regulatory universe. Thus, your understanding of the solution should be consistent whether you rely on Allan Gray, Alexforbes, Liberty, Old Mutual or Sanlam for your education, or you prefer the Financial Sector Conduct Authority (FSCA) version. Your writer enjoyed this comforting opener from Allan Gray: “As a retirement fund member, it is important to be aware of changes to your retirement products which will come into effect when the new two-pot retirement system is implemented on 1 September 2024; no action is required from you”. 

The underline in the previous paragraph is intentional, and your writer reckons all financial adviser types should put that up in large font somewhere in their offices and meeting rooms. Because doing nothing is arguably the most sensible post two-pots implementation choice. Saving for retirement is a multi-decade process that yields the best results if you leave your capital in the pot to benefit from the magic power of compounding. “The new system should not change how you think about or invest your retirement savings and should not have any bearing on your long-term retirement savings goals,” wrote Allan Gray. Exactly. 

The end-goals of retirement reform

National Treasury designed the new system with two goals in mind. First, they wanted to improve the preservation of retirement savings until retirement date by stopping the South African ‘disease’ of quitting jobs to get early access to accumulated savings. Second, they wanted to allow some access to accumulated savings to help retirement fund members during periods of severe financial distress. It is kind of sad that the industry, assisted by the mainstream media, has already positioned this savings pot as a ‘free to raid’ piggy bank to use for whatever. PS, kudos to the many who are advocating for the more sensible approach of keeping your capital invested for the long run. 

In this context, your writer enjoyed the common sense plea from Derek Pillay, retirement funds Principal Consultant at Aon South Africa. His message, shared in a media release under the heading, ‘be cautious in accessing your savings pot each tax year,’ promoted the tried-and-tested preservation mantra. “Accessing your savings pot will negatively impact your retirement outcome as your savings monies are eroded; the purpose of this system is to allow members access to monies for emergency purposes only,” he said. 

He also encouraged advisers and brokers to remind clients that they will pay admin fees and income tax (at your marginal tax rate) each time they dip into the savings pot; and he urged savers to seek financial assistance before accessing these savings. PS, SARS can also attach all or part of this withdrawal if a taxpayer is in arrears. 

A quick refresher, only the basics

The following is a quick refresher on the administrative wizardry that will take place on 1 September. First, your accumulated retirement savings up to 31 August will be ring-fenced in your vested pot. Your ongoing access to the balance in the vested account will be in line with your existing rights. Second, your retirement fund administrator will create the aforementioned savings and retirement pots. On 1 September, they will transfer an amount equal to 10% of your vested fund, capped to a maximum of R30 000, to your savings pot. From 1 September, additional contributions will split one-third to the savings pot, two-thirds to retirement. 

Now pay close attention because this is where things are a bit different. You or your client will not be able to access the new retirement pot until your retirement date, at which date the entire balance on that pot must be used to purchase a retirement income product such as a life or living annuity. As for the savings pot, you can make a withdrawal once per year, subject to a minimum of R2 000, and allowing for taxes and fees. Allan Gray warns: “You should only withdraw from your savings component as a last resort where, without such access, the alternative would likely lead to worse financial outcomes”. 

The financial services giant reiterated that there are no penalties for not withdrawing anything from the savings pot, and that the amount in that pot remains invested in the same way as the rest of your retirement funds; it will grow in line with the monies in your vested and retirement pots. Given the country’s rather shocking retirement savings outcomes, your clients should, therefore, be encouraged to exercise financial discipline, and keep their fingers out of all these pots for as long as possible. 

Stats shocker: retiring in poverty

“Current statistics show that a staggering 94% of South Africans will not be able to retire financially independent, leaving many retirees dependent on their family or their state pension and in a position where they need to continue working well past retirement age,” Pillay said. “Any money that you take from your savings pot is borrowing from your future self and future financial security”. He noted that high inflation and rising mortality rates meant your clients should be making extra provision for retirement rather than chipping away at their capital through early withdrawals, whether allowed by regulation or not. 

Finally, he acknowledged financial advisers and planners as integral in the retirement funding paradigm. “Always get the insights and advice of a professional broker to guide you to make the best decision for your retirement and to help you invest your money wisely so that your golden nest egg stretches as far as it possibly can,” Pillay concluded. “It is crucial to make better decisions today to ensure that you can enjoy the quality of life you want and need in your retirement years”. 

Writer’s thoughts:

The sheer volume of coverage of the two-pots retirement solution risks making advisers and clients ‘numb’ to the looming change. Have you done enough to guide your clients into the new retirement solution, including informing them of the negative effect of early withdrawals? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.