Changes to retirement benefits for provident fund members, initially meant to come in five years ago and now scheduled for next March, will see tax uniformity for all who contribute towards retirement. These changes, in terms of the Taxation Laws Amendment Act, will also encourage greater savings, something South Africa desperately needs as it seeks to crawl its way out of an economic hole.
Dolana Conco, regional executive, consulting, Alexander Forbes
“One of the aims of retirement reform is to create a uniform retirement fund system for all types of retirement savings vehicles, such as pension, provident and retirement annuity funds. This will allow all members to receive the same tax treatment of the money contributed and how benefits can be paid at retirement." says Dolana Conco, regional executive, consulting at Alexander Forbes.
Many reforms have been implemented over the last few years, but it has been a long journey for this next vital step. “The changes are beneficial for most retirement fund members and encourage greater savings for retirement and address issues in the retirement system.
“Currently provident fund members can take their retirement benefit as a full cash lump sum and do not have to buy a pension (annuity) from a registered insurer when they retire. However, pension fund members must use at least two-thirds of their retirement benefit to buy a pension, unless the total benefit is less than R247,500.”
How retirement reform affects members
From 1 March 2021, retirement benefits from provident funds will be treated in the same way as pension funds for the part of the benefit based on contributions. Conco explains that the changes for provident fund members are:
- Provident funds will have the same annuitisation rules as pension fundsThis means that members will have to buy a pension (annuity) from a registered insurer with at least two-thirds of their retirement benefit, unless the total benefit is R247,500 or less.
- Vested rights will applyRetirement savings will be ring-fenced as follows before the new legislation takes effect:
- Any provident fund balance saved before 1 March 2021 plus the future growth on this until retirement won’t be affected and can be taken in cash on retirement.
- Members who are 55 years or older on 1 March 2021 will not be affected by this change at all if they stay a member of the same provident fund (or provident preservation fund, as proposed in the draft Taxation Laws Amendment Bill until retirement. This means that the retirement benefit will be treated in the same way as it is currently being treated when these members retire. If these members transfer to another fund, they will still have vested rights, but contributions and growth on this to the new fund will require them to buy a pension with two-thirds of their retirement benefit.