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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.
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
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.
It is widely known that SA has a poor savings culture, and the 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 to ensure 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.
As the legislation currently stands, members of a provident or provident preservation fund can 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 they are invested in a pension, provident or retirement annuity fund.
From 1 March 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 and remains a member of the same provident fund.
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”.
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 if they remain members of the same provident fund.
However, if these members transfer their benefits to another fund, they’ll retain their “vested rights” on 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 their “vested benefits” and would need to use two-thirds of their “unvested benefits” to purchase an annuity
income.
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.
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.
Provident fund administrators will need to ensure that their systems are ready to give effect to these legislative changes.
Their systems will need to keep accurate records of all contributions and investment growth up to 28 February as these benefits will be vested. Thereafter, they will need to be able to record all premiums and growth from 1 March onwards as these will be unvested benefits. In addition, provident fund rules will need to be amended to separately identify vested and unvested benefits.
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’s hoped these changes will align the tax, withdrawal and annuitisation benefits across all retirement funding vehicles to streamline the industry and make it easier to understand.
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