Insights from Professor Terrence Kommal is a podcast that is broadcast on the Business Report and Personal Finance websites. This week, I have decided to look at what was discussed regarding the new retirement system as it is less than six weeks away.
The financial landscape in South Africa is undergoing significant changes, particularly regarding retirement planning, with the introduction of the new two-pot retirement system effective September 1.
This legislative shift aims to transform how individuals access their retirement savings, addressing pressing concerns surrounding financial readiness for retirement.
In a recent interview, podcast host, Kommal spoke with Farzana Botha from Sanlam to unpack the implications of this new system.
The structure of the new retirement system
Farzana Botha said that the traditional retirement products in South Africa, such as retirement annuities, restricted access to funds until specific conditions were met, such as death, disability, or reaching retirement age. This limitation often left individuals without recourse during financial emergencies, forcing them to resign from their jobs merely to access their savings. The new two-part system aims to change this paradigm by creating two distinct pots of money: a savings pot and a vested pot.
“The savings pot allows individuals to withdraw a portion of their retirement savings without needing to resign from their jobs, thereby enhancing financial flexibility. In contrast, the vested pot is designed to preserve retirement savings for the long term.
“This dual structure addresses the preservation problem that has plagued many individuals who found themselves starting from zero every time they left employment,” she said.
As Botha noted, employees can now access a portion of their savings — up to R30 000 or 10% of their total retirement value —without risking their long-term financial security.
Addressing consumer concerns
One of the primary concerns raised during the conversation between Professor Kommal and Botha was the potential impact of this new legislation on consumer behaviour and financial planning. While the ability to access funds in times of need is a welcome change for many, it also raises concerns about the long-term consequences of such accessibility. Botha said the financial planners are worried that while immediate financial relief may be appealing, it could lead to diminished retirement savings over time.
“The challenge is particularly severe for lower-income individuals and those living paycheque to paycheque. For these individuals, accessing retirement savings can seem like a quick fix for pressing financial issues. However, this short-term thinking often overlooks the long-term implications of withdrawing funds that would otherwise grow through compound interest,” she said.
Kommal said each rand withdrawn today could represent a significantly larger amount in the future, jeopardising an individual’s quality of life in retirement.
The role of financial education
To navigate these complexities, Botha said that education will play a crucial role. Organisations like Sanlam are committed to informing consumers about the implications of the new system and encouraging better financial planning.
“This involves not just educating clients on how to access funds but also instilling an understanding of the long-term consequences of their financial decisions,” she said.
Botha said consumers need to distinguish between present and future needs. The temptation to withdraw funds for immediate relief can overshadow the necessity of preserving those funds for future use. “Financial literacy programs can help bridge this gap by providing individuals with the tools needed to make informed decisions about their retirement savings,” Botha said.
Cultural perspectives on financial literacy
Kommal and Botha also discussed how financial literacy was influenced by cultural and generational factors. Many South Africans come from backgrounds where financial education was not prioritised, leading to a significant literacy gap that can perpetuate cycles of debt and inadequate retirement planning. Recognising this challenge, financial institutions are increasingly focusing on outreach efforts aimed at previously disadvantaged communities.
Botha said younger generations, particularly Millennials and Generation Z, exhibit different attitudes toward money management compared to their predecessors.
“They tend to favour instant gratification and may be less inclined to adhere to traditional saving methods. However, there’s a silver lining: these young adults are also more likely to seek out information through digital channels and are open to learning about financial products that align with their needs,” she said.
According to Botha, Financial advisers can play a pivotal role in helping clients navigate these challenges by offering personalised guidance that considers both current financial pressures and future goals.
Institutional readiness and consumer confidence
From an institutional perspective, both Kommal and Botha acknowledged that organisations have been preparing for these legislative changes for nearly two years.
“This preparation involves adapting existing products while ensuring that staff members are equipped with the knowledge needed to guide clients through this transition effectively. Communication strategies are vital; firms must ensure that clients understand how these changes will impact their finances and what steps they should take moving forward.
“As individuals begin to engage with this new system, there will undoubtedly be challenges and adjustments as consumers and institutions adapt. However, with proper education and support, there lies an opportunity for greater empowerment and improved financial outcomes for all South Africans,” Botha said.
The introduction of the new two-part retirement system in South Africa marks a significant shift in how individuals approach retirement savings and financial planning.
For the full interview, watch: https://bit.ly/2-pot-pension.
PERSONAL FINANCE