Prov­i­dent funds will be phased out very slowly

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - BRUCE CAMERON

Prov­i­dent funds, which al­low you to cash in all your re­tire­ment sav­ings at re­tire­ment, are to be phased out over an ex­tended pe­riod – it may pos­si­bly be up to 45 years be­fore the last ves­tiges of th­ese funds dis­ap­pear.

National Trea­sury has given no­tice that, from March 1, 2015, prov­i­dent fund mem­bers will be obliged – with some ma­jor ex­emp­tions to pro­tect vested rights – to use at least two-thirds of their re­tire­ment sav­ings to buy a pen­sion.

Un­til March 2015, prov­i­dent fund mem­bers will con­tinue to be al­lowed to with­draw all their sav­ings as a cash lump sum at re­tire­ment.

Trea­sury says the lack of onus on prov­i­dent fund mem­bers to buy a pen­sion at re­tire­ment “means that many re­tirees spend their re­tire­ment as­sets too quickly and face the risk of out­liv­ing their re­tire­ment sav­ings”.

To over­come this, prov­i­dent funds and prov­i­dent preser­va­tion funds must be aligned with other re­tire­ment and preser­va­tion funds, which re­quire that two-thirds of a mem­ber’s re­tire­ment sav­ings be used to buy a pen­sion for life.

The change will also mean that prov­i­dent fund mem­bers will be given the same tax de­duc­tion in­cen­tives as pen­sion fund mem­bers (see “T-Day for new tax regime on re­tire­ment funds will be in 2015”).

Trea­sury said in a me­dia state­ment this week that in an ef­fort to pro­tect his­tor­i­cal vested rights, mea­sures will be in­tro­duced to seg­re­gate his­tor­i­cal rights from new rights. Th­ese mea­sures are:

If a prov­i­dent fund mem­ber is older than 55 years of age as at March 1, 2015, the manda­tory pur­chase of a pen­sion will not ap­ply if the mem­ber re­mains in the same prov­i­dent fund un­til re­tire­ment.

Ac­crued sav­ings in prov­i­dent funds as at March 1, 2015, and any sub­se­quent in­vest­ment growth, will not be sub­ject to the pen­sion pur­chase re­quire­ment.

VESTED RIGHTS

Prov­i­dent fund ad­min­is­tra­tors will be obliged to keep proper records to give ef­fect to the new regime.

The pro­tec­tion of vested rights will ap­ply ir­re­spec­tive of whether the re­tire­ment in­ter­est re­mains in the prov­i­dent fund or whether it is trans­ferred to an­other re­tire­ment or preser­va­tion fund.

As a fur­ther mea­sure to en­sure a “com­fort­able” tran­si­tion to the new tax regime for prov­i­dent fund mem­bers, the cur­rent thresh­old for the “de min­imis” ex­cep­tion that cur­rently ap­plies to pen­sion funds will be dou­bled and ex­tended to prov­i­dent funds. Cur­rently if the to­tal value of your re­tire­ment sav­ings in any one re­tire­ment are R75 000 or less, you are al­lowed to take the amount as a cash lump sum. This amount will be dou­bled to R150 000 for all re­tire­ment funds.

By mak­ing it com­pul­sory for all re­tire­ment fund mem­bers to buy a pen­sion with two-thirds of their re­tire­ment sav­ings, a more flex­i­ble sys­tem al­low­ing free porta­bil­ity be­tween funds will come into ef­fect.

The trans­fer of re­tire­ment sav­ings to prov­i­dent and prov­i­dent preser­va­tion funds from other funds will, from March 1, 2015, be free from tax in all in­stances. This means you will be able to trans­fer your sav­ings in pen­sion funds to prov­i­dent funds with­out tax con­se­quences.

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