The new retirement fund rules
If you’re still working and saving, these changes could impact you if you belong to a fund
SEVERAL changes in retirement fund rules came into effect on 1 March. They’re aimed at ensuring you save enough for your retirement and create uniformity between the tax and annuity regimes for all types of retirement money.
James Coutinho, Liberty senior manager of group corporate and client tax, explains the rules.
KEY CHANGES
There are three new rules. Firstly, there’s the so-called annuitising of provident and provident preservation funds (we’ll explain what this means shortly). Secondly, retirement fund members are given more options to transfer their benefits tax-free to a wider range of funds. Thirdly, there are changes that apply to withdrawal before retirement if you’re planning to move abroad.
The new rules won’t really affect people who are already retired and receiving money from a retirement fund. But if you’re still saving for retirement, you could be affected.
There are pension funds, provident funds, pension preservation funds and retirement annuity funds. Your fund type is on your fund statement – or your employer’s human resource department or financial advisor can tell you what it is.
PROVIDENT & PROVIDENT PRESERVATION FUND: ANNUITISATION
Members of pension funds, pension preservation funds and retirement annuity funds currently take out part of their retirement benefits as annuity income at retirement. This is commonly known as annuitising.
All provident fund and provident preservation funds members though could withdraw the full value of their benefits as one (taxable) lump sum at retirement. But new members of provident funds will now also have to accept part of their benefits as an annuity at retirement. They’ll also have to annuitise their benefits if they’ve invested in a provident preservation fund. They may withdraw up to a third of their benefits as a taxable lump sum, but at least two-thirds of it must be treated as annuity income. However, the new annuitising rules don’t apply to: S Retirement benefits below R247 500 S The contributions (plus interest on them) of existing provident and provident preservation fund members up until 1 March 2021 S Provident fund members who were 55 years of age or older on 1 March 2021 may still withdraw their contributions and accumulation as a taxable lump sum at retirement. This means they can still withdraw all their savings plus the interest on it. For them nothing changes, as long as they stay with the same provident or provident preservation fund.
WHAT DOES ‘VESTED RIGHTS’ MEAN?
Existing members of provident funds originally accumulated benefits in those funds with the expectation of taking all their benefits as taxable cash lump sums at retirement. These members will now be given the (vested) right to still take those benefits already accumulated before 1 March (plus growth after that date) as taxable cash lump sums at retirement.
That money is called the vested member share. In other words, the vested benefit will follow the old rules and will be allowed as a taxable cash lump sum at retirement without the obligation to purchase an annuity. Contributions made after 1 March, plus growth, will still be subject to annuitising at retirement, as is already the case with pension and pension preservation funds and retirement annuity funds.
TRANSFERRING FUNDS TO OTHER FUNDS
Previously members of pensions and provident funds had very limited options if they wanted to transfer their money tax-free to another retirement fund.
Such a transfer would be necessary, for example, when you changed jobs. In future retirement fund members may transfer their money between pension funds and provident funds without negative tax consequences.
WITHDRAWALS BEFORE RETIREMENT IF YOU’RE EMIGRATING
In future, withdrawals will depend on the pension fund member’s tax status in SA, not on whether they’ve emigrated.
The new rules will affect members of retirement annuity, pension preservation and provident preservation funds. If they hadn’t formally emigrated or applied to emigrate by 1 March, the new rules won’t be based on their emigration but on their residential tax status. They’ll have to be able to prove that they were not a South African tax resident for three consecutive years before they can make a withdrawal before retirement.
This rule doesn’t apply to members of retirement annuity, pension preservation and provident preservation funds who have already emigrated or whose emigration applications by 28 February 2021 had been sent to the South African Reserve Bank (SARB) or other accredited banks (and thereafter within three years approved by the SARB). It also doesn’t apply to embers of pension and provident funds. The full after-tax value of the withdrawal benefit will still be available.