Retirement reforms have been taking place for a number of years. The latest changes were included in the Tax Administration Laws Amendment Act, 2020 (Act No. 24 of 2020) on 20 January 2021 and came into effect from 1 March 2021.
The National Treasury is focusing on harmonising the rules of the various kinds of retirement funds, including pension, provident, preservation and retirement annuity funds. One of the major recent changes is the alignment of provident and provident preservation funds with pension and pension preservation funds.
Previously the treatment of pension funds was different from that of provident funds. If a pension fund member retired, the member could get one third of the total benefit in a cash lump sum and the other two-thirds had to be used to secure annuity income over the rest of the member's life, thus ensuring a more sustainable investment and financial plan for the future.
A provident fund member could get the full benefit paid in a lump sum. A provident fund therefore provided more flexibility at retirement but could also introduce some risk in the longer term. Informed decisions on the investment of those funds were not necessarily made to provide for retirement.
Here is a summary of the key changes that came into effect on 1 March:
Changes and impact
From 1 March 2021, retirement benefits from provident funds are treated similarly to those from pension funds.
At retirement, the member of a provident fund will only be entitled to withdraw one third of the funds. The other two thirds must be used to secure annuity income.
Another important consideration relates to resignations, as opposed to retirements. The changes will only apply when someone retires. The restrictions do not apply if people resign or are retrenched.
Impact on existing members of provident funds
All benefits in existing funds as at 28 February 2021, and any future growth on these, will not be subject to the new requirements. The member will still be able to withdraw the full amount of these funds at retirement. However, any contributions made on or after 1 March 2021 will be subject to the new requirements.
If an existing member is over the age of 55, contributions made on or after 1 March 2021 are also not subject to the new requirements, as long as the member remains a member of the same provident fund. People over the age of 55 should therefore seek advice before making any changes to their provident fund or retirement plans if they wish to avoid being subject to withdrawal limitations.
New members of provident funds
Any member who contributes to a provident fund after 1 March 2021 and has not previously been a member will be subject to the new requirements upon withdrawal. They will have to use two thirds of their fund amount to secure annuity income.
Other considerations: Tax and emigration
Pension and provident funds are now essentially equivalent, so there are also no longer any beneficial tax considerations in choosing one over the other. Both will be taxed in the same way and provide the same relief.
Another important consideration is that new limitations have been instituted if a member wishes to withdraw funds because the member plans to emigrate. Withdrawal from a fund will only be permitted if the member can prove they have been non-resident for tax purposes for an uninterrupted period of three years – or if they submitted their exchange control emigration application before 28 February 2021.
These changes reinforce the government’s commitment to changing saving behaviour in South Africa and the focus on such issues is expected to be maintained in future to ensure sustainability.
People should seek help and advice in planning for retirement and make informed decisions, which will ensure that they are favourably positioned for life after retirement.
Why the changes?
The retirement reforms seek to:
- encourage employees to save and provide well enough for their retirement to ensure that they retire comfortably and their income that lasts for their lives in retirement.
- encourage employers to provide retirement saving plans to their employees as part of the employment contract.
- ensure that employees receive good value for money for their retirement savings and are treated fairly, and that their savings are prudently and diligently managed. They also seek to ensure that employees are kept informed of their retirement savings and to improve standards of retirement fund governance, including trustee knowledge and conduct, and the protection of members’ interest.
The information in this article does not constitute financial advice. Terms and conditions online.
Sources: National Treasury, Moneyweb