Changes coming to retirement funds in South Africa
1. In BUSINESSTECH on 15 November 2020 reference is made of a communiqué by the law firm Bowmans wherein important impending changes to the retirement industry are discussed. We are of the opinion that our readers would be keen to take notice of these changes and we therefore provide a summary of the communique’s contents as per BUSINESSTECH.
2. It seems that the next few months will be very busy for retirement funds and their administrators because the new tax rules regarding the annuitisation of provident funds will be coming into effect on 1 March 2021. These rules were first mooted in 2013 to harmonise the tax treatment of the different kinds of retirement funds.
3. During 2013 the National Treasury stated that a strong link existed between insufficient retirement income for retired members of provident funds and the lump sum payouts made by provident funds at retirement. “In short, the absence of mandatory annuitisation in provident funds means that many retirees spend their retirement assets too quickly and face the risk of outliving their retirement savings. In view of these concerns it is government’s policy to encourage a secure post-retirement income in the form of mandatory annuitisation”, per the explanatory memorandum that accompanied the Taxation Laws Amendment Bill of 2013.
4. The anticipated reforms were intended to come into force on 1 March 2015, but due to various circumstances they had to be postponed until next year.
5. In terms of the annuitisation rules members of “ retirement vehicles” , irrespective of whether the “ vehicle” is a pension fund, provident fund or retirement annuity fund (“ RA”), will be subject to similar rules regarding access to cash on retirement. Members of all retirement funds will only be able to take one-third of the total value of their retirement fund interest by way of a lump sum with the balance being taken as an annuity.
6. This is further subject to an exception where the total retirement interest does not exceed R247 500.00. In such a case the full amount may be taken in cash. These “ grandfathering “ provisions exist to ensure that the restriction will only apply to amounts contributed to funds on or after 1 March 2021 and not to members who are close to retirement. This means that the rules will not apply to the following:
(a) The credit in the fund as at 1 March 2021 and subsequent fund returns on that amount.
(b) Members of provident funds and provident preservation funds aged 55 years and older on 1 March 2021 who will be entitled to take full benefits on retirement including the fund return, as well as any contributions made to the provident fund after 1 March 2021.
7. Provident funds and their administrators will need to keep accurate member records indicating the pre-March 2021 contributions and growth, and the post-March 2021 contributions and growth.
8. Bowmans envisage that after all those who are subject to the “grandfathering” provisions have exited the system, it will be necessary to consider whether there is any point in retaining the concepts of “pension funds” and “ provident funds” any longer.
SOURCE: BUSINESSTECH