With the expected advent of the Two-Pot Retirement System in September 2024, South Africa stands on the brink of a significant overhaul in retirement savings. Yet, a recent Old Mutual survey reveals a concerning trend: half of the independent financial advisers who participated in the survey feel ill-equipped with the necessary information to advise their customers effectively on this new system.

Old Mutual Advice Manager Keith Peter said that as we observe Financial Literacy Month this April, the spotlight turns to the urgent need for enhanced education and support for advisers, ensuring they are fully prepared to navigate this landmark shift in retirement planning.

“With the Two-Pot Retirement System on the horizon, there’s a loud and clear call for ramping up financial literacy and beefing up adviser education. We’re stepping into a whole new era here, and it will take advisers who are not just on their toes but ahead of the game. This is all about giving customers the kind of savvy, dependable guidance they need to secure their financial future.”

The survey was conducted with 301 independent financial advisers on their experience working with financial institutions to see how working relationships can be optimised and how IFAs can be best supported.

Pressing questions

Peter says the primary hurdle advisers face is addressing customer anxieties regarding the accessibility and management of their funds under the new Two-Pot Retirement System. Initially slated for a March debut, the system has seen its launch postponed to September, amplifying customer uncertainties and adviser challenges.

“The big question from customers is about accessibility. There’s been significant outreach from customers eager to understand how, when, and how much money they can access and the tax implications,” Peter says. “On the other hand, people want to know how withdrawals will affect their retirement planning.”

He says this uncertainty is compounded by the administrative complexities anticipated with the Two-Pot Retirement System’s introduction, raising concerns among advisers about the added administrative burden and potential customer costs. Advisers must provide comprehensive and accurate answers to these questions.

All retirement fund members will see 10% (limited to a maximum of R30,000) of their existing retirement funds being transferred to the new savings pot on 1 September 2024. One-third of all subsequent fund contributions will also go to the savings pot. Any amount accumulated in the savings pot can be withdrawn once per tax year.

The tax implications

In addition, taxation could catch many customers off-guard. Under the new Two-Pot Retirement System, understanding the tax implications of withdrawals will be crucial for financial advisers as they guide their customers through retirement planning. The South African Revenue Service (SARS) treats withdrawals from the Savings Pot as “income,” meaning these withdrawals will be taxed according to the customer’s marginal tax rate. While contributions and the growth on these amounts remain untaxed, the tax becomes payable when benefits are withdrawn.

This system ensures that retirement fund members are taxed just once on their savings, either when they make pre-retirement withdrawals at their marginal tax rate or when they access their funds at retirement, at which point the retirement tax rate applies.

Financial advisers must be adept at navigating these tax nuances to help their customers strategise effectively, optimising the timing and amount of withdrawals to minimise tax liabilities and maximise retirement income. Early withdrawals could lead to customers being inadequately prepared for retirement, depleting their one-third accessible pot, and missing out on compound interest.

“Customers must understand the system’s tax implications, and advisers must be able to provide them with a detailed assessment of the impact of withdrawing money and how much tax it will cost them,” he said.

The need for continuous learning

Addressing the pressing need for adviser education, Peter highlights the proactive steps taken by financial institutions to bridge the knowledge gap.

He notes, “Most companies are rolling out workshops, master classes, and regular articles to explain the Two-Pot Retirement System,” underscoring the pivotal role of business consultants in supporting independent advisers through this transition.

Yet, independent advisers face unique challenges, navigating a deluge of information from multiple sources. Peter points out that while this sheer volume and diversity of information can offer a broader perspective, it can also overwhelm and confuse their advisory roles. Institutional-based advisers have access to a wide range of professional support that ensures they are constantly up to date with the latest changes in the industry.

Peter said independent advisers could stay abreast by regularly consulting with financial institutions’ business consultants. Such communication will help address regulatory changes without succumbing to information overload by prioritising the most essential changes.

“Establishing a structured plan for professional development, such as attending three significant events a year, subscribing to crucial industry publications, and conducting quarterly check-ins with a legal adviser, can also prevent information overload,” he says.

“This coordinated approach ensures advisers remain up to date with industry changes without needing to attend every event, thereby avoiding the pitfalls of information fatigue. Collaborating with colleagues to share insights from different events can further enhance learning and understanding within the professional community,” he concluded.