Treasury’s retirement reform initiatives – all you need to know
2020 was a difficult year for many reasons, but what comes to mind first is the impact the last 12 months had on the financial stability of individuals, companies and the economy. Safe to say that many people are feeling unsure about their financial future, especially their retirement savings. And with the new retirement reform regulations coming into effect in just a few days, additional fear and doubt might set in.
If you are feeling a pinch of anxiety over next week’s changes to provident funds, take a deep breath and stop worrying. We have put together a quick, yet comprehensive guide to help you understand the regulation changes and how it will affect you. Spoiler – it’s all positive!
Why are changes being made?
These changes have been put in place to improve the financial future of South African retirees by standardising the way funds can be withdrawn. Less than 10% of South Africans have enough funds to retire comfortably and the implementation of the new regulations is one of Treasury’s strategies to improver the safety and security for people in retirement.
Are my retirement savings safe?
Yes, 100%. These changes do not impact the safety of your funds or the growth of your investments, merely the way funds are withdrawn and transferred between funds. It is also important to note that these changes will primarily affect contributions made to provident funds from 1 March 2021 – any and all contributions made up to 28 Feb 2021 will be unaffected, more on this later.
What if I belong to a Pension Fund or contribute to a Retirement Annuity, will these changes affect me?
No. These changes will only affect provident and provident preservation funds. If you contribute to a pension fund, pension preservation fund or a retirement annuity, you will not be affected by these changes.
What is changing?
Two changes are set to take effect on 1 March 2021, namely the annuitisation of provident funds at retirement and the enhanced tax-free transferability between retirement funds. Changes to the former will mainly impact provident fund members younger than 55. There are however instances where people older than 55 will be impacted, please contact us if you are older than 55 as you will require specialised assistance.
- The annuitisation of provident funds
All retirement contributions already made into the provident fund, plus investment growth earned on these contributions, accumulated up until 28 February 2021 including any future investment growth on this accumulated amount up to the date of retirement, will be regarded as vested benefits.
This means that this accumulated amount may be accessed as a cash lump sum at retirement Alternatively, an annuity to provide a retirement income can be purchased with the accumulated amount at retirement, if the member chooses this option.
Retirement contributions made into the provident fund from 1 March 2021 plus investment growth on these contributions up to the date of retirement will be treated differently and will be regarded as non-vested benefits.
This means that at retirement, members can only access up to one third of this accumulated amount as a cash lump sum, and the balance must be used to purchase an annuity to provide an income in retirement. If, however, the non-vested benefits fall below R 247 500 the full amount may be accessed as a cash lump sum at retirement.
- Enhanced tax-free transferability between retirement funds
This is the most exciting change. Previously, if you were to move funds from a pension fund to a provident fund, there would have been tax implication. However, due to these changes, the distinctions between ‘restrictive’ retirement funds such as pension funds and ‘less restrictive’ retirement funds such as provident funds will fall away.
This means that from 1 March 2021, you will be able to transfer accumulated retirement savings between pension funds, pension preservation funds, provident funds and provident preservation funds, tax-free.
If you have any questions regarding your current pension or provident fund, please don’t hesitate to get in touch with Cornerstone Employee Benefits. Also, for more fun, informative and thought-provoking content, follow us on Facebook and LinkedIn and remember to check out the blog section of our website for past and future articles.