Blue Chip Issue 89

BLUE CHIP COLUMN A New

BLUE CHIP COLUMN A New Horizon The Three Piggy Bank system and the future of retirement planning in South Africa. Kobus Kleyn, CFP®, Tax and Fiduciary Practitioner, Kainos Wealth Kobus Kleyn has published over 200 articles and authored four books. He is a multiple award-winning professional and holds eight memberships with professional associations. His most recent awards were lifetime achievements awards from the FPI (Harry Brews), The Million Dollar Round Table (Top of the Table Life Membership) and Liberty Group (Life Membership) in 2021/22. Retirement planning, at its core, is an interplay of saving, strategising and securing a future. As a Certified Financial Planner® (CFP®), I have witnessed the metamorphosis of these mechanisms in South Africa. Today, we stand on the precipice of one of the most transformative shifts in how we think about our retirement: the introduction of the “Three Piggy Bank” system. The origin of the Three Piggy Bank concept The term “Three Piggy Bank” system is nostalgic in my heart. As a child, I had three piggy banks where I would allocate my allowance. One for immediate spending, another for short-term savings and the third for long-term aspirations. These piggy banks acted as early lessons in financial planning, teaching me the importance of balance between immediate desires and long-term goals. Today, I see a reflection of that personal history in the proposed legislation for retirement planning in South Africa. Understanding the Three Piggy Bank system The proposed system divides retirement funding into three separate but interconnected components: 1. Vested Component (Piggy 1). This “bank” is dedicated to safeguarding all retirement savings accumulated up to skrikkeljaar (29th February 2024). Beyond this date, its growth will be limited, except for some specific scenarios. For instance, those related to provident fund members aged 55 or above as of 1 March 2021 will find more flexibility here. 2. Savings Component (Piggy 2). Starting from skrikkeljaar 2024, this “bank” will receive a third of all retirement contributions. It’s designed with flexibility, aiming to serve as a financial cushion. Annual withdrawals are allowed from this pot, offering solace during financial emergencies. 3. Retirement Component (Piggy 3). Acting as the vault for most post-leap day 2024 contributions (two-thirds, to be precise), this “bank” focuses on ensuring financial security post-retirement. While its primary purpose is preservation until retirement, provisions will exist for early withdrawals in specific situations, such as emigration or job redundancy. It’s essential to stress that the system is still evolving. While the foundation is being laid, the architectural details are in flux. Feedback, discussions and negotiations are an ongoing part of this process, making it a collaborative effort. Cosatu’s involvement has been noteworthy. Current discussions hover around a cap of R25 000 for the maximum annual withdrawal from the Savings Component in the initial year. Yet, given the energy and direction of the dialogues, I foresee this ceiling being revisited and adjusted upwards soon. Why this system holds promise South African retirement planning is navigating uncharted waters. Its blend of flexibility and stability makes the “Three Piggy Bank” system particularly promising. As a CFP®, I firmly believe that this structured, yet adaptive approach could serve as a bedrock for future generations and help mitigate the taxpayer’s load. The world is watching developments in our pioneering work. The ongoing negotiations and discussions are typical when introducing a change of this magnitude. They’re essential to refining and enhancing the system, ensuring it meets the diverse needs of our population. What’s crucial is to embrace the evolutionary nature of this process and to remain open to adjustments that align with the best interests of South Africans. In conclusion The coming of skrikkeljaar 2024 is set to mark a significant chapter in South African retirement planning. The proposed system, deeply rooted in a philosophy of balance, can potentially redefine our approach to retirement. Drawing inspiration from the simple financial lessons of my childhood, this system promises immediate financial relief and long-term security. I eagerly anticipate its role in shaping a brighter, more secure future for future generations. 16 www.bluechipdigital.co.za

COLUMN BLUE CHIP Consider paying off debt prior to retirement Coming to the end of your working career requires a step up in terms of financial planning. Florbela Yates, Head of Equilibrium Florbela Yates is the head of Equilibrium in the Momentum Metropolitan group. Equilibrium is an independent discretionary fund manager that partners with financial advisors to help them enable their advice outcomes. Equilibrium brings balance to an advice practice by delivering services and investment solutions to help clients achieve their defined investment goals. You need to ensure you have sufficient means to afford a comfortable retirement. But as we know, despite having a well-thought-out budget and a tax-efficient financial plan, most South Africans still retire without having saved enough and often go into retirement with large debt burdens. Research conducted by the South Africa Reserve Bank and Stats SA shows that South Africans spend 75% of their take-home pay on refinancing debt, and one in three South Africans retire with debt. Planning for retirement takes time. If your clients leave it until the day that they retire, it will be too late. Some of the considerations that your clients will need to think about are: • How much money will I need to meet my monthly financial needs? • Will my emergency fund be able to supplement any unforeseen expenses? • Will sufficient cash be available to meet my funeral costs or estate duty if I die prematurely? • Is my current medical aid plan still going to suit me and be affordable post-retirement? • Do I want to leave a legacy for my family? In addition to the above considerations, it also depends on what stage your clients find themselves in their retirement years, being the initial retirement stage, the second stage of retirement, or the third or final stage of retirement. Regardless of the stage, additional circumstances will affect each person differently during each of these. One of the aspects not considered is being in debt in retirement. I asked a colleague who spent much of his career as a valuator and advisor to retirement funds how trustees tend to guide their members. Rowan Burger, head of strategic finance at Momentum Metropolitan and a regular commentator on regulatory and investment matters, says that it starts with how you consider your house in your retirement plan. A house should not be considered a capital asset but rather that it reduces the required retirement income as you do not need to pay rent. Banks extend debt to those who have income to cover the debt. In retirement, you don’t have a salary to cover the debt repayments. But in the event you have debt at retirement, should you pay it down immediately? Rowan suggests this is the wisest course of action. If you consider that a typical bond rate is a bit less than the prime rate, then currently it could be about 11%. Your investment return after fees would then need to be around 13% to cover the interest cost (as share growth attracts capital gains tax). It is very difficult to get a return of 13% in the current environment, and at an older age, you certainly do not want to be taking on unnecessary investment risk. For that reason, taking one-third of your retirement fund as a lump sum (as clients are allowed to do) to settle any debt is a good idea (and even more essential for more expensive debt such as credit cards). Debt must be paid down as quickly as possible in the retirement savings plan. In future, there will be less scope for cash at retirement to bail out debt. This is a result of the introduction of compulsory annuitisation, which can be made worse by the two-pot retirement system if clients consume their one-third lump sum before they get there. At Equilibrium, we bring improved balance into your financial advice practice. Our unique advice-led model portfolios are designed to be efficient and optimised through market cycles, so your clients stay invested and achieve their investment goals. As an independent discretionary fund manager (DFM), we enable you to do what matters – spending more time with your clients so that you can help them make the right decisions for their retirement. Equilibrium Investment Management (Pty) Ltd (Equilibrium) (Reg. No. 2007/018275/07) is an authorised financial services provider (FSP32726) and part of Momentum Metropolitan Holdings Limited, rated B-BBEE level 1. www.bluechipdigital.co.za 17