Two-pot retirement system: Advice can prevent you walking off financial cliff

With the two-pot retirement system changing the retirement landscape, sound advice from a registered financial adviser can prevent you from walking off a financial cliff.

Two-pot retirement system adds another risk

As the winds of change rush through South Africa’s retirement fund landscape, the introduction of the two-pot system marks a watershed moment in how South Africans can approach retirement planning, Jessica Pillay, financial adviser at Momentum Financial Planning, says.

“Just when we thought it could not get any more hazardous, we will now have access to a portion of our retirement savings. One more risk means one more reason to forge a solid financial plan and get to grips with the knock-on effects of your financial decisions.” 

There is the allure of immediate financial relief, but we have to tread carefully, she warns. “The two-pot system, while offering a lifeline in emergencies, could potentially jeopardise your financial future if not handled with caution and with the right advice behind you.”

That is why she is raising the red flag, Pillay says.

“Dipping into your retirement savings is a risky game and this is no time for playing. While the short-term benefits may seem enticing, the long-term repercussions could be dire. It is imperative to grasp the gravity of withdrawing from these funds and the impact it can have on your years in retirement.”

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Most households do not know how to save for retirement

To put it into perspective, the latest Momentum-Unisa Household Financial Wellness Index reveals both financially literate and illiterate households portrayed a broad understanding of the concept of saving for retirement. However, all households lacked detail on when (at what age) they should start saving for retirement and how much of their income they should allocate towards retirement savings.

With the index showing that 87% of households indicate a reliance on their own knowledge, online resources, or family and friends when making financial decisions, the reality is that most South Africans have not really thought about how they will live when they retire.

“And even those who did plan are not feeling too sure about it. They are worried about things like prices going up and how the economy is doing. It is like we are all just crossing our fingers and hoping for the best when it comes to retirement,” Pillay says.

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With the unknown on the horizon, this is all the more reason to seek counsel from trusted financial advisers before making any hasty decisions. The Household Financial Wellness Index found that only 10% of all households consult with knowledgeable professionals for financial advice.

Comprehensive financial plan for retirement

Pillay says having a comprehensive financial plan serves as a beacon of clarity in navigating the complexities of retirement planning. “It provides tangible goals, instils disciplined savings habits and offers a roadmap to financial security. Partnering with a reputable financial adviser empowers you to craft tailored strategies that align with your unique circumstances and aspirations.”

She warns that retirement planning is not a one-size-fits-all venture. “It requires careful consideration and informed decision-making. Whether opting for a living annuity or a life annuity, understanding the nuances of each option is paramount. Many consumers may be lost at this already crucial point of departure.”

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A guaranteed life annuity is like a steady salary you get every month. You give a chunk of your retirement savings to an insurance company and in return, they promise to keep paying you regularly for the rest of your life, she explains.

On the other hand, a living annuity could be a bit riskier. “With this one, you are in charge of managing your money. There are no guarantees as is the case with the guaranteed life annuity. You can choose how much money you want to take out every year, anywhere from 2.5% to 17.5%.

“But here is the catch: you can only change this percentage once a year on the anniversary of when you first invested. Therefore, it is like having more control but also more responsibility for your retirement money.”

Look for an innovative approach

But why settle for an either-or scenario when you can have the best of both worlds? You can find an innovative approach that combines a living annuity and a life annuity. This integrated strategy offers the growth potential of a living annuity alongside the security of a life annuity, mitigating market risks while ensuring a steady income stream throughout retirement, she says.

“Without a financial adviser, you may never have this option presented to you. Think of all the other options that are out there and tailored exactly to your unique retirement needs and challenges.”

Pillay says the journey to retirement success does not end with choosing the right annuity and understanding the two-pot retirement system. “Ongoing increases in the cost of living, coupled with rising life expectancy rates underscore the need for continued financial vigilance. Budgeting, adequate medical cover and prudent investment in financial solutions are essential pillars in securing a comfortable retirement.”

The path to financial security in retirement is paved with informed decisions and proactive planning, she says. “By seeking guidance from seasoned financial advisers and embracing innovative solutions, South Africans can confidently navigate the retirement maze.”