WORDS ON WEALTH:
Up until now there have been two distinct types of retirement funds offered by employers to their employees: pension funds and provident funds. Many company retirement funds offer both.
Traditionally, the differences between pension and provident funds were that in a provident fund your contributions were from after-tax income (in pension funds it was from pre-tax income – in other words, your contributions were tax-deductible) and that on retiring from a provident fund you could take your entire benefit as a lump sum, unlike a pension fund, where two-thirds of your benefit had to be used to buy a pension.
If, during your working years, you changed jobs and cashed in your savings instead of preserving them, the tax consequences for provident fund members were not as severe as those for pension fund members, because provident fund savings were from after-tax income.
About a decade ago, the government embarked on an ambitious retirement reform programme, which was primarily aimed at getting working people to save more for retirement and to preserve their savings when they changed jobs. The programme had various facets, and it continues to this day.
Some of the main changes to the retirement fund landscape in the past several years were:
- Upping the tax-deductible amount for pension fund contributions from 7.5% of your annual income to 27.5%, with a ceiling of R350 000. This coincided with changes to how you were taxed on your income and employee benefits: retirement fund contributions your employer made on top of your own would now be considered part of your income – previously, your employer could get a tax-break on these contributions, which could be up to 20% of your salary.
- The introduction of the retirement fund default regulations. These were regulations under the Pension Funds Act that compelled retirement funds to be more proactive in ensuring that members knew what their options were on joining, resigning or retiring, and requiring funds to offer “default” investment and preservation options, which would automatically apply unless the member actively chose a different option.
- The harmonisation of pension funds and provident funds. This would essentially wipe out the differences between the two: provident funds would become pension funds in their treatment of members’ contributions and withdrawals. Thus, contributions to provident funds were also made tax-deductible up to 27.5% of pre-tax income. However, on the second major change – the requirement that two-thirds of the benefits at retirement should be used to buy a pension (referred to in the industry as annuitisation) – the government came up against stiff opposition from the trade unions. It is this second change that comes into effect on March 1, after a few years’ delay in which some concessions were made to the unions.
Dolana Conco, regional executive of consulting at Alexander Forbes, says the changes for provident fund members are:
- Provident funds will have the same annuitisation rules as pension funds. This 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 apply. Retirement savings will be ring-fenced as follows:
- Any provident fund balance saved before March 1, 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 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,” Conco says.
How will this work for members under 55 years of age on March 1?
Say you are 50 years old and have been contributing to a provident fund for 30 years. On March 1 your accumulated savings is R4 million, which is ring-fenced. In 15 years you retire aged 65. Your total benefit at retirement is R9 million, of which R2 million is growth on the ring-fenced R4 million. The remaining R3 million is savings plus growth accumulated after the change.
As a lump sum you will be able to take R6 million (ring-fenced R4 million + R2 million growth) plus one third of the remaining R3 million, for a total of R7 million. The remaining R2 million will have to be used to buy a pension.
PERSONAL FINANCE ~ 20 Jan 2021