On 21 July 2024, President Cyril Ramaphosa signed the Pension Funds Amendment Bill (PFAB) into law, marking an important milestone in South Africa’s retirement reform. This new legislation paves the way for the two-pot retirement system, which aims to enhance retirement savings and provide greater flexibility for retirement fund members. The PFAB amends several pieces of pension-related legislation, including the Pension Funds Act of 1956 and the Government Employees Pension Law of 1996, to introduce a savings withdrawal benefit and account for members’ interests in savings, retirement, and vested components (aka the “two-pot” system).
Key points for financial advisors
Financial advisors play a crucial role in guiding clients through these changes. Some essential points for advisors to consider are:
- Ensure that clients’ personal details are current and match the official records of their retirement funds. Inconsistencies can lead to processing delays when members wish to withdraw from their savings component. Accurate and up-to-date information is crucial for seamless communication and transactions.
- Clients will need a valid tax directive from the South African Revenue Services (SARS) to withdraw from their savings component. Advisors should confirm that their clients have a valid income tax registration number. Without a tax directive, the withdrawal process could be delayed, causing frustration and potential financial strain for clients.
- Inform clients about potential tax consequences. Withdrawals from the savings pot are taxed at marginal tax rates and may affect the client’s tax bracket. Additionally, any outstanding taxes or penalties may be deducted from the withdrawal amount, possibly resulting in a reduced payout. This is an important consideration that clients must understand to avoid unexpected tax liabilities.
- Highlight the irreversible nature of a withdrawal request once a tax directive has been applied for. Clients must understand their tax status and potential tax liabilities before making a withdrawal.
- Once the directive is issued, it cannot be reversed or cancelled, making it essential for clients to be fully informed before initiating a withdrawal.
- Pre-retirement withdrawals do not erode the R550,000 tax-free benefit but do reduce the cash available at retirement. Advisors should educate clients on the long term impact of early withdrawals on their retirement savings. This includes explaining the potential reduction in retirement income and the importance of maintaining sufficient funds for future needs.
- Advisors must continue to comply with the FAIS Act, General Code of Conduct and related regulations. Providing clients with all relevant information to make informed decisions remains a fundamental duty.
The importance of financial education and a collaborative approach
Financial advisors must stress the importance of preserving retirement savings and using emergency fund savings for unforeseen expenses. Financial education is critical in helping clients understand the value of long term savings and the potential negative impact of premature withdrawals.
Many fund members might be tempted to withdraw funds to pay off debts, cover school fees or handle other expenses that may not qualify as emergencies. Advisors should highlight the value of building and maintaining an emergency fund separate from retirement savings.
Long term implications, tax efficiency and strategies
The two-pot system offers greater flexibility for fund members, allowing them to access a portion of their retirement savings before retirement. However, it also requires careful planning and consideration. Advisors must help clients balance the need for immediate access to funds with the long-term goal of securing a comfortable retirement.
Financial advisors should work with clients to develop tax efficient withdrawal strategies. Understanding the tax implications of early withdrawals and how they fit into the client’s overall financial plan is essential. This involves evaluating the timing and amount of withdrawals to minimise tax liabilities and maximise the benefits of the two-pot system.
FPI’s Two-Pot system resources
The Financial Planning Institute (FPI) has recorded the basics of the two-pot system in various languages to help consumers understand the new system and the importance of seeking financial advice. Visit the FPI’s YouTube channel to view these informative videos. The videos are designed to make the information accessible and highlight the crucial role of financial advisors in guiding clients through this transition. If you are a professional member of the FPI, please ensure that your details on Find a Financial Professional on our consumer website, are correct.
May the sailing into the new era be smooth for all.
