Time for advisers to wade into the two-pot advising opportunity
At least a third of South African retirement fund members are already planning to dip into their savings pots for a second time following the 1 September 2024 implementation of the two-pot retirement solution signalling a once-in-a-generation opportunity for the financial advising community. Your entry point could be the insights and trends study shared by Alexforbes: it is based on 8200 comprehensive survey responses and a data analysis of over one million members.
Enhanced financial well-being
The two-pot solution seeks to enhance the financial well-being of retirement fund members by balancing long-term savings with short-term financial needs. National Treasury designed the solution to allow access to retirement savings for genuine financial emergencies, but the country’s hard-pressed consumers ended up raiding their savings pots for a variety of reasons. More on that in a moment. A recent presser published by the South African Revenue Service (SARS) offers some excellent insights into the state of local households.
By 31 January 2025, SARS said it had received over 2.664 million applications for tax directives for withdrawals from the Savings Withdrawal Benefit of the two-pot system. Over 2.403 million tax directives were approved for funds to be released; the remainder were declined for a variety of reasons, including incorrect identity numbers and incorrect tax numbers, amongst others. A total gross lump sum of R43.42 billion has been paid out to date. Little wonder the South African Reserve Bank (SARB) and Treasury forecast a GDP boost from the initiative.
Why should financial advisers and planners care? First, the sheer volume of applications hints at the financial stress local consumers are experiencing. Second, the scale of withdrawals points to the potential of leveraging the two-pot solution to improve clients’ long-term financial outcomes. A study of the Alexforbes and SARS statistics also provides useful insights into consumers’ relationships with money. Withdrawal data provided by the financial services firm shows that financial stress is widespread across age groups and sectors.
Claims from here, there and everywhere
Around 76% of the claims processed by Alexforbes were from members aged 31 to 51, highlighting significant financial responsibilities in this age group. The firm noted that 59% of claims were from members with fund credits of less than R250000, and 94% from members earning salaries below R550000 per annum, demonstrating that financial needs often outweigh the benefits of preserving savings for retirement. Claims were observed across all sectors, with 24% from the wholesale and retail trade, 10% from mining, 9% from manufacturing, and 2% from professional and business services.
The massive interest in gaining access to retirement savings is reflected in the utilisation of SARS’ digital channels. The tax authority noted that its simulated WhatsApp calculator had been used 90283 times since implementation, while the simulated calculator on the SARS website had been used close to a million times. “Taxpayers are encouraged to continue to use the digital channels, which are simple, easy and user-friendly; taxpayers [can access information without] leaving their homes or places of employment,” SARS said.
SARS also took a moment to thank retirement fund management entities for their friendly and professional co-operation throughout the process, allowing the tax authority to play its part effectively and efficiently by speedily issuing the volumes of tax directives needed. A quick look at Alexforbes’ data shows just how much pressure local financial services providers had to endure. By the end of January 2024, they had processed more than 370000 claims with a total value exceeding R7 billion.
Redefining financial emergencies
“The high volume of claims highlights the immediate financial needs of members and reinforces the importance of effective digital platforms and administrative capabilities,” Alexforbes said. However, a study of the utilisation of savings suggests a wide divergence in what Jane and Joe Average define as a financial emergency. In the financial institution’s experience, 80% of claimants used their withdrawals for debt repayment and essential living expenses, including repaying debt (50%) and covering essential costs (30%).
Other uses included major purchases (13%), vehicle maintenance (7%), financial investments, home improvements, medical bills, and education. “These findings indicate that members are prioritising financial stability when accessing their savings; given [the observed] trends [we believe that] debt solutions and rewards programmes could provide additional value to members, helping them better manage their finances while preserving long-term savings,” Alexforbes wrote. There is clearly an opportunity for South Africa’s financial advising community to step up to the plate.
An early assessment of withdrawals suggests that retirement fund members are transacting without face-to-face advice. According to Alexforbes, fund members were relying on digital platforms and services for information. They reported over 550,000 views and 1.8 million interactions on the My Money Matters toolkit, more than four million logins to AF Connect (their member portal), 20,000 participants in webinars, and 259,000 calls and emails managed by call centres since 1 September 2024. “These channels have enabled members to access information and advice, receive retirement benefits counselling, and make informed decisions about their savings,” they said.
Get yourself in the game
Your writer reckons financial advisers and planners could have a field day by seeking closer alignment with the retirement benefits consulting segment. At the very least, they could use some of SARS’ helpful information to inform an additional outreach to existing clients. Top tips include telling clients to verify their tax numbers and check whether they have any outstanding debt with SARS before submitting a withdrawal request. Advisers can also inform them of the process.
The first step is for the retirement fund to apply for a tax directive from SARS. After a registered taxpayer has applied, a successful tax directive informs the fund management how much tax to deduct from the subsequent savings pot withdrawal. “Before a final amount is paid to the applicant, the pension fund will be informed to also deduct any outstanding debt on behalf of SARS before any payout is made to the member; if a person has a debt arrangement with SARS, the withdrawal will not be affected,” the tax authority said.
Aside from settling any outstanding tax debts, SARS will also impose an income tax on the withdrawal, calculated at the taxpayer’s marginal tax rate, ranging between 18% and 45%. Financial advisers can assist clients in this area by ensuring they do not misrepresent their annual incomes. Since the solution went live, SARS Commissioner, Edward Kieswetter, said it had identified 213,654 taxpayers who had “declared incorrect taxable income with the view to have a more favourable tax rate [at withdrawal].” He warned against trying to evade tax obligations and said a penalty would be imposed for understated income.
2025 Just the beginning
The data supports that South African consumers were in desperate need of a financial crutch. This year’s withdrawals process will likely be less frantic than last, but there are still plenty of members who will dip into their retirement savings through 2025. Alexforbes says around 47% of its members plan to claim in the future, with 34% of previous claimants already intending to claim again. “Among those who did not make an initial claim, 33% do not plan to claim, while 13% are considering it,” they said.
Overall, the two-pot system has proven to be a crucial financial resource, enabling members to manage financial challenges while preserving most of their retirement savings. Alexforbes believes the solution will have a transformative impact on long-term retirement savings outcomes. “By allowing access to a portion of savings for financial needs while preserving the remainder for retirement, projections indicate that retirement outcomes could improve by two to two-and-a-half times for new members under this system,” they concluded.
Writer’s thoughts:
The surge in two pot savings account withdrawals highlights the delicate balance between financial security today and long-term retirement planning. How can advisers help clients navigate short-term needs without jeopardising their future? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
