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Provident Funds and Lump Sum Withdrawals – how the imminent changes in policy will affect you

 

Provident funds have come into the spotlight in 2021. In the last year there were calls for government to amend its policies on the accessibility of retirement funds. The reason was to allow for financial relief for people affected by the economic distress cause by the Covid-19 pandemic and government-imposed lockdown.

 

There was some relief from the National Treasury. Individuals that receive funds from a living annuities were allowed to increase or decrease their proportion of annuity income. These changes were to be immediate. The permission to do so was temporary.

 

In keeping with the government’s long term retirement reform strategy,  investors overall will have less access to their retirement funds at retirement.

 

Effective 1 March 2021, Provident fund member will no longer be allowed to withdraw a cash lump sum of 100% of their fund credit at retirement. This has always been an option for members of provident funds, subject to applicable taxation.

 

It is important to highlight that this law does not effect pre-retirement withdrawals and pension and provident fund members will still have access to withdraw their funds if they resign before retirement.

 

Legislation a long time coming

 

It is envisaged that workers will be encouraged to save (more) through retirement funds and be able to provide for their own retirement and curb old-age poverty and excessive dependency on relatives and the Government.

 

This legislation was originally proposed in 2013 and was slated to have come into effect in 2015. However, due to an outcry from the public, it has been delayed until now. We have also seen that the same rules of tax deductibility apply to all retirement plans since 2016.

 

Retirement Annuities and Pension Funds: Capped at 33.3% Lump sums 

 

Those who invest in pension funds or retirement annuities have always had this restriction. On retirement, at least 66.7% of their savings must utilised to purchase an  annuity (pension) which can be paid monthly, quarterly, bi-annually or annually.

 

The changes will mean that, from 1 March 2021 provident funds will be treated in very much the same way as  retirement annuities, pension preservation funds and pension funds.

Exceptions to the new rules of provident funds

 

There are exceptions to the new legislation.

  1. If you are already 55 years old or older on this date you will be exempt from the new procedures. This will mean that upon retirement you will be permitted to take the full amount as a lump sum of cash.
  2. These changes will not be implemented retroactively. This means that whatever your fund is valued at on the 28thFebruary 2021 can still be taken out as a lump sum on retirement. This should include future growth on that amount.
  3. If the complete worth of the provident retirement fund assets accumulatedpost 1 March 2021 is not more than R247 500, these changes will not apply. You will still be able to withdraw the total amount of your provident fund.

 

Simplifying transfers between provident funds and other retirement plans

 

One of the results of the new legislation will be that transferring funds from provident funds to pension funds will be easier. The changes bring them more in line with retirement annuities and pension plans.

 

 

Why has the National Treasury made these changes to provident funds?

 

Only between 6% and 10% of South Africans are able to retire comfortably. This is sadly in line with global trends concerning retirement. One of the factors contributing to this state of affairs in South Africa is that people often cash in their retirement funds before they are 55.

 

A study showed that during their career lifetime, South Africans will change their jobs between five and seven times. Almost 80% of those who quit their jobs have been cashing in their retirement savings as lump sums.

 

Of those who take this course of action, 57% have used these funds to cover living expenses while looking for a new job and 43% use it to settle debts.

 

The result of this behaviour has contributed to many, even most, South Africans not having saved enough for retirement. Another analysis shows that many members have to live on less than one fifth of their salary during their retirement. Taking the total amount as a lump sum means that there is a good chance that absolutely nothing will be left for retirement. The long-term loss of the benefits of compound interest often does not factor into these decisions. You cost your future self a highly substantial amount of money when you spend your retirement fund savings now.

 

For these reasons, the National Treasury has taken these steps. It is in an effort to safeguard retirement fund assets against erosion. Many people overlook the expenses that they need to plan for in retirement. It is likely these costs will increase as the quality of life improves for the elderly. The hope is that by limiting the amount that members can withdraw as a lump sum, more South Africans will have an income for their years of retirement. This should mean that they will not spend their savings too quickly and retirees can support themselves for the rest of their lives.

What’s not changing

 

It doesn’t matter if you change jobs or are dismissed or retrenched, you will still have access to your retirement savings (vested rights and non-vested  rights). Regardless of whether that’s in the form of a pension fund or a provident fund, the same rule applies. The law does not impact your access to your money, so do not panic by going off-road. That could be a decision you regret.

 

When a change does happen, such as moving jobs or being dismissed or retrenched, you will automatically become a paid-up member in SURF after your last contribution is invested. You  can then choose to leave your paid-up benefit  in  SURF until some point  in  the future or until you elect to retire, or you can transfer it to your new employer’s fund or to a preservation fund or a retirement annuity, or you can take the benefit as a cash lump sum (and pay tax).

 

Whatever you choose to do, remember to take time to consider each decision. Approach each pothole with caution, be consistent and contribute as much as you can in order to secure a comfortable retirement.

The changes to provident funds are quite intricate

 

The contributions and growth of the fund will need to carefully indicate pre- and post- March 2021 contributions and interest earned on them. Different taxation will be applicable on each of these categories.

 

Provident fund trustees and administrators will be upgrading their systems to keep track of these contributions and their growth. They will also confirm which assets are vested and which are non-vesting. To trace these assets properly, they will need to be separated.

 

The contributions and growth of the fund will need to carefully indicate pre- and post- March 2021 contributions and interest earned on them. Different taxation will be applicable on each of these categories.

 

MOREBO is there to help

 

The new legislation is quite complex. Your provident fund must be monitored and managed properly. If it is not, you could be liable for unwanted tax implications. There are also implications regarding retirement funds for anyone seeking to immigrate.

 

We are here to help you navigate the implementation of this complicated legislation.

 

If your current place of employment has proposed future changes to the current management of your retirement fund contact us. We can assist in ensuring that those changes are compliant and won’t incur unnecessary tax or other penalties.

 

If you have been considering searching for better performance for your provident fund, contact us to see what options are available.

 

If you are in the process of changing employers, we will advise on the process of moving your provident fund.

 

With the date of the new legislation, all the above scenarios have become acutely time-sensitive. Morebo is there to assist and guide in the course of ensuring the best returns on your provident fund. Do not be afraid to reach out to our certified experts for professional advice and support in this uncertain time. We will bring you the certainty you need.

 

Bibliography/Further Reading

https://www.iol.co.za/personal-finance/retirement/here-are-the-impacts-of-retirement-reform-on-sa-in-2021-74d8e27f-822f-4e4c-b5c5-2f4bb3f899ed

https://www.moneyweb.co.za/qa/advisor-questions/will-i-be-able-to-draw-all-the-cash-from-my-pension-preservation-fund-after-march-2021/

https://www.investopedia.com/ask/answers/102814/what-are-main-differences-between-provident-fund-and-pension-fund.asp

 

https://businesstech.co.za/news/finance/349447/pension-fund-vs-provident-fund-vs-retirement-annuities-in-south-africa/

https://www.iol.co.za/personal-finance/call-for-government-to-unlock-retirement-funds-48477295

https://businesstech.co.za/news/finance/440157/what-you-should-know-before-cashing-out-your-pension-in-south-africa-and-what-it-will-cost-you/

https://www.news24.com/drum/money/4-reasons-cashing-out-your-retirement-fund-when-you-change-jobs-is-a-bad-idea-20191025

https://www.dailymaverick.co.za/article/2020-12-13-only-10-of-south-africans-save-enough-for-retirement-the-industry-needs-to-change/

https://www.iol.co.za/personal-finance/only-6-of-south-africans-will-retire-comfortably-36378758

https://www.sanews.gov.za/south-africa/covid-19-tax-relief-interventions-gazetted

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Morebo Wealth (Pty) Ltd, an affiliate of Liberty, the Liberty Group Ltd is an authorised Financial Services Provider in terms of the FAIS Act (no. 2409)
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