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With almost 100 days before the launch of the two-pot retirement system, financial advisers are urged to highlight the risks of withdrawing their funds for people older than 55
However, Keith Peter, advice manager at Old Mutual Personal Finance, warns the two-pot retirement system, which allows for more flexible access to retirement funds, demands careful consideration, especially for older pension fund members.
“Introducing the two-pot retirement system is a pivotal moment for individuals over 55. With only a few short years until retirement, they must carefully manage their contributions to secure a stable financial future.”
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The system divides retirement contributions into two pots: one-third for savings that can be accessed before retirement and another for funds only accessible at retirement. The two-pot retirement system also has specific provisions for individuals who were older than 55 on 1 March 2021 and members of the same provident fund.
From 1 September this year, they can choose to remain under their current system, which allows for a 100% cash withdrawal of all funds saved before 1 March 2021 when they retire. Alternatively, they can opt for the new system, which could provide better tax efficiency and income stability.
“It is crucial that advisers comprehensively understand their customers’ needs and encourage them to make informed decisions that align with their long-term financial health,” Peter says.
Whatever option you choose, Peter advises against premature withdrawals from the savings pot, highlighting the tax implications and the potential reduction in retirement income.
“Accessing your funds early could lead to a significant tax burden, as withdrawals will be taxed at the marginal rate, while funds accessed upon retirement receive more favourable tax treatment under the retirement tax tables. They will also miss out on the power of compound growth on the funds in the savings pot.”
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He says for example, a fund member who is 55 and plans to retire at 60 with a current pension fund valued at R1 million on 31 August 2024 who has monthly pension contributions of R6 000, or R72 000 annually, will have R2 000 (R24 000 annually) allocated to the savings pot and R4 000 (R48 000 annually) to the retirement pot.
Factor in a 6% annual contribution increase and an 8% growth rate for the pension fund. On a September 2024 this fund member’s savings pot will hold R30 000, the lesser of R30 000 or 10% of the total pension fund value. Consequently, the vested pot, representing the remaining balance after the savings pot allocation, will be R970 000 (R1 million minus R30 000).
If the fund member withdraws from the savings pot annually, including the initial seeding capital, the total value of the retirement fund at age 60 will be R1 765 066. If the member does not withdraw from the savings pot, including the seeding capital, the total value of the retirement fund at age 60 will be R1 979 023, a difference of over R200 000.
Therefore, Peter says, consistency is the key. He believes financial advisers should emphasise stability and adherence to their customers’ established financial plans when guiding them through the two-pot retirement system. Often, the best approach is to maintain the current strategy and avoid prematurely accessing the savings pot as far as possible.
“This cautious approach helps to safeguard the capital the member accrued over his or her working life. Financial advisers should review members’ plans annually, adjusting only as needed to address any shortfalls while continuing to invest in conservative to moderate funds.”
Peter says this strategy ensures that the investment growth remains steady, albeit not explosively high, securing the necessary funds for a comfortable retirement.
In addition, each member’s unique circumstances, such as specific financial needs, aspirations and retirement goals, should dictate tailored advice, ensuring that advisers provide personalised and practical guidance through the intricacies of the new retirement system.
Peter says the new system presents challenges as well as opportunities. For advisers, this is a chance to deepen customer relationships and improve financial outcomes for retirees.
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