You won’t lose your rights to your re­tire­ment sav­ings

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - Bruce Cameron

on’t rush out and do some­thing silly such as re­sign from your job or get di­vorced just so that you can get your hands on the cash in your re­tire­ment fund in the wake of government’s lat­est pro­pos­als on how re­tire­ment sav­ings must be pre­served. That’s what many peo­ple did when government first an­nounced, in 2006, that it planned to re­form the re­tire­ment­fund­ing sys­tem.

False ru­mours were spread that fund mem­bers would lose their ex­ist­ing (or vested) rights. Low-in­come mem­bers of prov­i­dent funds were par­tic­u­larly con­cerned that they would not re­ceive a so­cial old- age grant (Soag) if they re­tained their of­ten mea­gre re­tire­ment sav­ings to buy a pen­sion.

In re­ac­tion to government’s ini­tial pro­pos­als, many peo­ple re­signed so they could get their hands on their money, and many were left un­em­ployed.

This time, government has gone out of its way to spell out how your ex­ist­ing rights will not be af­fected; and it has pro­posed some sig­nif­i­cant mea­sures to en­sure that fund mem­bers do not take fi­nan­cially dam­ag­ing steps, such as re­sign­ing from their jobs.

The four most im­por­tant ad­di­tional pro­pos­als are:

Do­ing away with the means test for the Soag. This will re­sult in ev­ery­one re­ceiv­ing the grant,

Dalthough it may be in­cluded in their tax­able in­come. This will not af­fect most low-in­come earn­ers, be­cause, in many cases, their pen­sions plus the Soag will be be­low the tax thresh­old, or they will be on the low­est rates of mar­ginal in­come tax.

Mem­bers of prov­i­dent funds who are older than 55 on T-day (the date from which it will be com­pul­sory to pur­chase a pen­sion with any new prov­i­dent fund sav­ings) will not be re­quired to pur­chase a pen­sion us­ing any of their re­tire­ment sav­ings at re­tire­ment, pro­vided they re­main in the same prov­i­dent fund un­til the day they re­tire. So if you are 55 on T-day but re­tire 10 years later, you will still be able to take 100 per­cent of your sav­ings as cash, sub­ject to tax.

(Note: If you use your prov­i­dent fund sav­ings to buy a com­pul­sory pur­chase an­nu­ity, you will score tax-wise, be­cause there is no in­come tax, cap­i­tal gains tax or with­hold­ing div­i­dends tax on the in­vest­ment re­turns. You will also avoid any lump sum tax­a­tion, which means you will earn tax-free re­turns on your in­vested cap­i­tal un­til you re­ceive the pen­sion, when it will be taxed as in­come at your then mar­ginal rate of tax­a­tion. This is al­ready pos­si­ble.)

The de min­imis amount at which you are re­quired to an­nui­tise (pur­chase a pen­sion) will be raised from R75 000 to R150 000. This means if your to­tal re­tire­ment sav­ings from any sin­gle source are be­low the de min­imis amount, you do not have to use two-thirds of your sav­ings to buy a pen­sion. You can take all the money as cash, sub­ject to lump­sum tax­a­tion.

A change to the rule of be­ing al­lowed to make only one with­drawal from a preser­va­tion fund. Cur­rently, a with­drawal can be any­thing be­tween zero and 100 per­cent of your bal­ance. This has two con­se­quences:

Mem­bers who leave their funds when they re­sign, or are fired or re­trenched, with­draw too lit­tle cash and are left in des­per­ate fi­nan­cial need and un­able to ac­cess their re­main­ing sav­ings when they are still un­em­ployed months later; or

Mem­bers with­draw all their sav­ings, and of­ten spend the money, and are left des­ti­tute when they can­not find an­other job.

The pro­posed change will al­low re­tire­ment fund mem­bers to have on­go­ing ac­cess to their pre­served re­tire­ment sav­ings to en­sure they have a cash flow dur­ing what may be long pe­ri­ods of un­em­ploy­ment. The pro­posed cash flow amount is the greater of the Soag (R1 260 a month from April 1) or 10 per­cent of the ini­tial trans­fer to a preser­va­tion fund from P-Day (the date on which the preser­va­tion rules change for re­tire­ment funds).

The ex­ist­ing rights that will be pro­tected in­clude:

The sav­ings bal­ance in your pen­sion or prov­i­dent fund on Pday, plus any growth earned on that bal­ance up to the date on which you leave your fund, will not be sub­ject to the new rules that gov­ern the preser­va­tion of sav­ings. You will be able to ac­cess this amount, in cash, at any time af­ter you leave your fund or join the pro­posed preser­va­tion sec­tion of a re­tire­ment fund.

If you be­long to a preser­va­tion fund on P-Day, your ini­tial de­posit will be deemed to be equal to the value of your preser­va­tion fund on P-Day, and vested rights will ap­ply to this amount if you have not taken ad­van­tage of the pro­vi­sion to make a sin­gle with­drawal. If you have used your sin­gle with­drawal, vested rights will not ap­ply. So, if you have made a sin­gle with­drawal, the bal­ance will be­come sub­ject to the same rules that ap­ply to any new sav­ings made from P-Day.

How­ever, for preser­va­tion to work prop­erly, government has to do more to halt reck­less lend­ing, par­tic­u­larly in the un­se­cured lend­ing space, where in­ter­est rates are far too high and the abuse of con­sumer credit as­sur­ance is sim­ply ap­palling. The prac­tices amount to le­galised loan shark op­er­a­tions.

Reck­less lend­ing is cre­at­ing a gen­er­a­tion of con­sumers who are en­snared in debt. As long as this is the case, over-in­debted re­tire­ment fund mem­bers will con­tinue to re­sign from their jobs or get di­vorced in a des­per­ate at­tempt to get their hands on their re­tire­ment sav­ings.

Reck­less lenders must be made to take a lot of pain for what they are do­ing to im­pov­er­ish peo­ple.

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