Finally! It’s D-day for retirement reforms

First published in the Daily Maverick 168 weekly newspaper.

The first change

While provident fund members were previously able to withdraw the entirety of their savings as a lump sum on retirement, they will now be restricted to withdrawing a third of their savings as a lump sum and using the remaining two-thirds to buy an annuity. An annuity is a financial services product that pays you a monthly amount in retirement so that your money (theoretically anyway) will last longer.

If you have saved less than R247,500, you may withdraw the full amount in cash.

Malusi Ndlovu, head of Old Mutual Corporate Consultants, welcomed the move to proceed with the annuitisation of retirement funds this year: “This decision underpins the state’s commitment to providing adequate retirement provision to all working South Africans and addressing the potential long-term drag of ageing workers on the fiscus.”

Ndlovu says that without the annuitisation requirement at retirement, many provident fund members could become dependent on the state or relatives in their retirement, despite having saved well throughout their working lives. He echoes sentiments expressed by National Treasury as far back as 2013, in an explanatory note on the retirement reforms: “A strong link exists between insufficient retirement income for retired members of provident funds and the lump sum pay-outs 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.”

Mica Townsend, business development manager and employee benefits consultant at 10X, says for most people, purchasing an annuity is the most sensible and tax-effective way to manage their retirement savings. “It is sensible because the legal draw-down limits will enhance the longevity of those savings, and  be tax-effective because it lowers the average rate at which those savings are taxed,” she says.

What are your vested rights?

 The changes seem simple enough but get a bit complicated when you take into account the vested rights that have been provided for. James Coutinho, senior tax adviser at Liberty Group, says 1 March will serve as a watershed date when it comes to the treatment of your retirement funds on withdrawal and vested rights will differ based on your age on 1 March.

If you are under 55: The savings you accumulated up to that date plus any growth on that money will be regarded as a vested benefit that you can take out as a cash lump sum on retirement. For example, if you have a benefit of R250,000 on 1 March and, when you retire in 10 years’ time, the R250,0000 has grown to R400,000, you will be able to draw the R400,000 as a cash lump sum on retirement. However, all your contributions to the fund after 1 March as well as growth on those contributions will be regarded as non-vested benefits and will follow the same rules as pension funds where you have to purchase an annuity with two-thirds of your savings on retirement.

If you are over 55: National Treasury has noted that those who fall in this age bracket are relatively close to retirement and has made provision for additional vested rights. Basically, all your contributions and growth up to 1 March plus all contributions and growth thereafter will be vested.

“So, assuming you remain in the same provident fund and continue with your contributions, nothing changes and you can still withdraw the entire lump sum on retirement. That’s quite a significant concession,” Coutinho says.Townsend points out that fund administrators will have to separate these balances, possibly for the next 40 or 50 years.

“This separation will underline the importance of preserving even seemingly small amounts. To illustrate, in the context of a 40-year savings plan, the vested balance after just 10 years (plus subsequent returns) will make up some 45% of the final savings balance,” she says. Townsend says even if you have been saving for just five years up to 1 March, 30% of your fund balance will be subject to the old provident fund rules. “Add in the one-third lump-sum portion available from the non-vested portion, and you would still be able to cash in more than half your retirement savings in 2055.”

The second change

Previously, if you changed employers and you were moving from, for example, a pension fund to a provident fund, you had three choices: leave the money invested with your former employer’s pension fund; or transfer the money to a pension preservation fund; or withdraw the money subject to withdrawal tax. The new retirement reform means you will be able to transfer your benefits seamlessly between funds regardless of what type of funds they are.

The third change

Currently, if you have a pension preservation fund, a provident preservation fund or a retirement annuity, you can access your savings in full and exit the fund if you emigrate.

The revised legislation means that your emigration will only be recognised if you have already emigrated or put in a formal emigration application before 1 March.

“After 1 March, the criteria to determine whether or not you can access the money will not be based on emigration but on you ceasing to be a tax resident in South Africa and you would have to demonstrate that you have not been a tax resident for an uninterrupted period of three years,” says Coutinho. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.