Retirement fund harmonisation: Your questions answered

The latest Taxation Laws Amendment Bill, which includes changes to the laws that govern provident and provident preservation funds, is set to come into effect on 1 March 2021. This piece of legislation is the final step in National Treasury’s process of harmonising the rules of retirement funds, including pension, provident, preservation and retirement annuity funds. 

What is the purpose of these legislative changes? 

One of the main aims of these legislative changes is to create a uniform retirement fund system across all types of retirement funding vehicles. These changes will also serve to iron out anomalies and to make the retirement funding industry easier for members to understand. 

What does National Treasury hope to achieve? 

It is widely known that South Africa has a poor savings culture, and government intends to use these legislative changes to ensure that provident fund members preserve their capital rather than withdrawing the full amount when they retire. While the government provides tax incentives for members to invest in provident funds in order to ensure that they are well-funded for their retirement, being able to withdraw 100% of savings at retirement defeats the purpose of granting the tax incentives in the first place. 

What are the current annuitisation rules on retirement funds? 

As legislation currently stands, members of a provident or provident preservation fund are allowed to take 100% of their retirement benefit as a lump sum on retirement, subject to the applicable taxation on the non-tax-exempt portion. On the other hand, members of pension or pension preservation funds and retirement annuities are only permitted to commute one-third of the retirement benefit in cash at retirement, with the remaining two-thirds being used to purchase an annuity income. Where a member’s interest is R247 500 or less, they are entitled to make a full withdrawal regardless of whether he is invested in a pension, provident or retirement annuity fund. 

What will change on 1 March 2021? 

From 1 March 2021 onwards, provident funds will be subject to the same rules at retirement as pension funds and retirement annuities, except where a provident fund member is age 55 or older on 1 March 2021 and remains a member of the same provident fund. 

What happens to provident fund member retirement interests on 28 February 2021? 

For existing provident and provident preservation fund members, all accumulated member interests plus any future growth on those benefits as at 28 February 2021 will be given ‘vested rights’ and will not be impacted by these legislative changes. This means that, at retirement, a member will still be entitled to commute up to 100% of these ‘vested benefits. 

How does this impact provident fund members who are age 55 or older on 1 March 2021? 

As mentioned above, this category of member is not affected by this legislation and will be able to withdraw 100% of their provident fund at retirement provided that they remain members of the same provident fund. However, if these members transfer their benefits to another fund, they will retain their ‘vested rights’ on their member interest accumulated until the date of transfer from the old fund, including all subsequent growth. Therefore, any contributions to the new fund, as well as any growth on those contributions, will be subject to the new annuitisation rules. In such circumstances, at retirement, the member would be permitted to withdraw 100% of his ‘vested benefits’ and would need to use two-thirds of his ‘unvested benefits’ to purchase an annuity income. 

What about provident fund members who are younger than age 55 on 1 March 2021? 

Where a provident fund member is younger than 55 on 1 March 2021, this new legislation will only affect new contributions made from 1 March onwards. All contributions and growth on those premiums made prior to this date will receive the vested rights. 

What are the tax implications of these changes? 

The tax treatment of retirement fund contributions was aligned in March 2016, allowing members of provident, pension and retirement annuity funds to invest up to 27.5% of taxable income, subject to an annual limit of R350 000, on a tax-deductible basis. This legislation will ensure that transfers between various retirement funding vehicles will be tax-free from 1 March 2021. Previously, there were tax implications where a member transferred a benefit from a pension fund to a provident fund.  

How does this affect provident fund administrators? 

Provident fund administrators will need to ensure that their systems are ready to give effective to these legislative changes. Their systems will need to keep accurate records of all contributions and investment growth up to 28 February 2021 as these benefits will be vested. Thereafter, they will need to be able to record all premiums and growth from 1 March 2021 onwards as these will be unvested benefits. In addition, provident fund rules will need to be amended to separate identify vested and unvested benefits. 

Does this affect me if I resign?  

The requirement to purchase a pension will only apply when you retire from your fund. Should you leave your employer due to resignation, retrenchment or dismissal, you will not be required to purchase a pension and can retain the option to take your funds in cash, subject to tax.   

Financial advisors will also need to ensure that they fully understand these legislative changes and how they impact on their clients’ options going forward and at retirement. It is hoped that these changes will align the tax, withdrawal and annuitisation benefits across all retirement funding vehicles so as to streamline the industry and make it easier for members to understand. 

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