The race to be ready is on
PENSION FUND REFORM: INDUSTRY HAS ONLY SIX MONTHS TO PUT PROCESSES IN PLACE The lack of final legislation and the early date of implementation are complicating things.
Pension funds and their administrators are racing against time to implement highly complex changes to their rules before South Africa’s pension fund reforms come into effect on 1 September this year, instead of 1 March 2025 as originally planned.
A major concern is the lack of final legislation, which means some 3 000 retirement funds will have to amend their rules without knowing whether there will again be changes once the final bill is passed.
“There is still a lot of uncertainty and there is only about six months within which all the processes must be set in place,” said Joon Chong, tax partner at Webber Wentzel.
“We need the legislation to be tabled to parliament, voted on and passed so that it can be published and made into law. We need that really soon.”
It can be done, and hopefully it will be done smoothly, she adds.
Nicci van Vuuren, senior associate at Webber Wentzel, said pension funds still need to communicate all the changes to members, who have to understand what the changes mean for their retirement.
“The problem is you cannot educate someone if you do not know what the final legislation says,” said Van Vuuren.
“Even if there is an overall understanding … there [are] still a lot of little nuances that need to be finalised. We still do not have a date when the final legislation will be promulgated.”
Parliament only started yesterday.
Jenny Klein, principal associate at ENSafrica, said there are two competing objectives.
Some people have a desperate need to access their retirement savings. On the other hand, the industry wanted to have sufficient time to implement these extensive changes.
It is important to get it done correctly to avoid chaos when millions of members want to withdraw, and the systems are not in place, she said.
The new system
There are three components to the new system. At implementation, the value of a member’s retirement savings will be fixed. That is the vested component. The current rules remain applicable to that portion, which means on retirement, the onethird lump sum amount will be taxfree up to R550 000 and the two-thirds portion will be annuitised.
The savings component (savings pot) will have “seeding capital” that will be automatically transferred to the savings pot.
This is 10% of the vested pot up to R30 000. Going forward, one-third of the contribution will be allocated to the savings pot and two-thirds to the retirement component (retirement pot).
Contributions and the growth in the retirement pot will be preserved until retirement. “People will no longer be able to leave their employment in order to access their retirement savings,” said Klein.
Tax directives
The South African Revenue Service (Sars) will have to be ready to issue millions of directives once the system is in place since pension funds will not know what the individual’s marginal rate will be if there are different streams of income.
“If someone lost their job or their income greatly decreased, then you want them to benefit from their current tax rate,” said Klein.
She gives another example where an individual withdraws R20 000 from their savings pot. It will be under the taxable threshold, but that amount forms part of their total income for a tax year, which may be taxable. They may have a shortfall on the tax that they have paid. This is also not a desirable situation.
Chong warns that an even less desirable situation is where people have outstanding tax debt.
The general rule is that if a lump-sum directive is applied for, Sars can instruct the retirement fund administrator to withhold the debt against the lump sum.
“There is no clarity on whether this will happen with the savings withdrawal, but my gut feel is that they will do it.”
She gives an example where an individual withdraws the R30 000 seed capital but has outstanding tax debt of R7 000. If the person has a tax rate of 25% the tax on the withdrawal will be R7 500. This leaves the person with R22 500 minus the R7 000 tax debt = R15 500.
Concerns were raised about the impact on retirement savings if people are able to withdraw before retirement. Actuarial studies have shown that even if an individual withdraws from the savings component every year, the results will be better overall because the two-third component is effectively locked in until retirement, said Chong.
It is important to do it correctly to avoid chaos when members want to withdraw