New retirement system: get advice before you do anything

NMG Benefits
3 November 2022
4 min read

Working South Africans should seek professional retirement benefit counselling before they make any major decisions around making withdrawals from their retirement funds, says employee benefits advisory firm NMG Benefits.

This is especially critical ahead of the implementation of the country’s new ‘two-pot’ system, which will allow retirement fund members to access up to a third of their net retirement fund contributions to provide short-term financial relief.

Natasha Huggett-Henchie, a principal consultant at NMG, says there is ‘a lot of confusion and concern’ in the marketplace about the impact of the new system, with many analysts saying it could have dire long-term consequences for fund members who already save too little for retirement.

It’s also important to realise that contributions into your ‘savings pot’ will only start on 1 March 2023 at the earliest, which means there won’t be any immediate relief from this change.

“It’s important that people aren’t tempted to treat their retirement funds as a transactional account. That’s why we’d recommend that regulators allow only annual withdrawals, with a free once-off withdrawal and one free withdrawal every five years. Any further withdrawals should be subject to an administration fee,” she said. “Remember also that every withdrawal will be taxed at your marginal tax rate.”

However, in the long run, NMG believes the move could actually benefit consumers, as it will prevent people from having to take out expensive short term loans. At the same time, being forced to preserve two-thirds of their funds over the long term (and not cashing in when they change employers) will improve retirement outcomes for most fund members.

“The important thing is to talk to a counsellor who specialises in retirement plans. This ensures that you will have the correct amount of money saved when you retire, and that your resources will be handled in a safe and predictable way,” said Huggett-Henchie.

There are four ways that retirement benefit counselling can help you plan a better future.

Make smarter retirement decisions

Retirement benefits counsellors help you navigate the numerous options for investing your retirement income based on your own personal needs, and help you make smart financial decisions throughout the process. They will help you understand your various options and alternatives when it comes to deciding to withdraw or not, and what the ramifications of those decisions will be.

Pay less tax

One of the biggest benefits of retirement planning is to structure your retirement funds in a tax-efficient manner. The more control you have over your income sources in retirement, the more likely you are to be able to reduce your tax burden. Because future tax regulations are difficult to predict, diversifying your income sources in retirement could save you a lot of money in the long term.

Peace of mind

Most people see retirement as a time to relax and take it easy. The reality is often quite different. Retirement can cause severe financial stress, especially if you have left your job before your planned retirement age or have to care for an elderly or sick spouse. The comprehensive retirement plan you work out with your counsellor will cover savings for medical expenditures and probable long-term care costs, as well as reduce the likelihood of having to depend on your friends or relatives to fill the gaps.

Know your annuity options

An annuity is an agreement between you and an insurer, in exchange for an upfront payment, that ensures you will have retirement income for the rest of your life if you structure this wisely. There are three primary forms of guaranteed retirement annuities that provide an income for life (and your spouse’s life if you elect this option), but which don’t pay a lump benefit on death: fixed, variable, and indexed annuities.

Living annuities pay a lump sum on death, but your annual income is unlikely to keep pace with inflation, and could even reduce when markets fall – or drop to almost zero if you erode the capital.

“Luckily, it’s not an either/or option. The optimal solution would be a blend of the two – we recommend that you secure your fixed living expenses (medical, rent, food, electricity etc) via a guaranteed annuity to ensure these costs are covered for life, and buy a living annuity with the residual capital that you have at retirement, to be able to leave some legacy for your family. Your retirement benefits counsellor will assist you in determining which annuity combination is the appropriate one for you,” said Huggett-Henchie.

T&Cs apply. The NMG SA Group of Companies are authorised financial services providers t/a NMG Benefits.


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