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 is scheduled to “go live” on 1 March 2024, says Lizl Budhram, the head of Advice at Old Mutual Personal Finance.
From that date, fund members 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, Budhram said.
What 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,” Budhram said.
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 RAs can access their accumulated capital only 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 RAs 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 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.
Old Mutual 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 be accessed only 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 RAs – could prove tempting for RA customers.
“In the past, the capital in RAs 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 said.
Helping clients to navigate the pending two-pot changes
One of the first steps when advising clients 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 RAs 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,” Budhram said.
Financial advisers must also consider how the change might impact a client’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: it is a tax-effective tool to maximise the capital available to them at retirement.
There are two clear messages to share with clients: first, early withdrawal puts your retirement plan at risk; and second, early access to your savings “pot” is for emergencies only.
Getting clients to make changes to their financial behaviour usually takes more than one adviser-client 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,” Budhram said.
