James Coutinho, Senior Manager Group Corporate and Client Tax at Liberty
A NUMBER OF RETIREMENT FUND RULE REFORMS WILL COME INTO EFFECT ON 1 MARCH 2021, ALSO KNOWN AS T-DAY.
These new rules will not only standardise the way in which benefits can be accessed across different funds at retirement but will also facilitate the phasing out of emigration for purposes of exchange control. The ultimate aim of these changes is to encourage retirement savings and ensure that members’ retirement benefits are spread throughout their retirement.
THE KEY CHANGES
There are three significant changes coming into effect on T-Day. In short, these are the annuitisation of provident funds and provident preservation funds, the ability for retirement fund members to preserve and consolidate benefits across a wider range of retirement funds, as well as changes to the pre-retirement access of benefits due to emigration.
The government’s retirement fund rule changes appear complicated at first glance and many fund members are no doubt asking themselves if and how they will be affected by these changes.
ANNUITISATION OF PROVIDENT FUNDS AND PROVIDENT PRESERVATION FUNDS
Members of pension funds, pension preservation funds and retirement annuity funds (RAFs) are required to take a portion of their benefits as annuity income at retirement. This is commonly referred to as annuitsation. Members of provident funds and provident preservation funds, on the other hand, have always been able to take the full value of their benefits as taxable cash lump sums at retirement.
From T-Day, new members joining provident funds will also be required to annuitise their benefits at retirement. They will also be required to annuitise those benefits if they subsequently preserve them in a provident preservation fund. It will still be possible for them to take up to one-third of their benefits as a taxable cash lump sum, but at least two-thirds of their benefits will have to be taken as annuity income. If the value of their retirement benefits is R247 500 or less, the full value of their retirement benefits can then be taken as a taxable cash lump sum.
VESTED RIGHTS FOR EXISTING MEMBERS
The position will be different for existing members of provident funds and provident preservation funds who accumulated benefits in those funds prior to T-Day. Existing members of provident funds and provident preservation funds have accumulated benefits prior to T-Day with the expectation of taking those benefits as taxable cash lump sums at retirement. As a consequence, the new rules will give them vested rights to the benefits they have already accumulated under previous legislation.
Existing members of provident funds who are younger than 55 on T-Day will have the right to take the benefits they have accumulated up to T-Day, plus investment returns on those benefits after T-Day as a taxable cash lump sum at retirement.
Contributions made after T-Day, plus investment returns on those contributions, will however be subject to annuitisation at retirement, just like a pension fund, pension preservation fund and RAF benefits.
Existing members of provident funds who are 55 or older on T-Day will have the right to take all the benefits they accumulate before and after T-Day as a taxable cash lump sum at retirement. They will not be required to annuitise any portion of their benefits, provided their post T-Day contributions continue to be made to the same provident fund.
Existing members of provident preservation funds who preserved their benefits before T-Day, on the other hand, will only accumulate investment returns on their benefits so they will be able to take all their benefits as taxable cash lump sums at retirement – irrespective of their age on T-Day.
It is important to note that existing members of pension funds, pension preservation funds and RAFs will be largely unaffected by these changes as they are already required to annuitise their benefits at retirement.
ENHANCED PORTABILITY AND CONSOLIDATION OF FUNDS
The annuitisation of provident funds and provident preservation funds means that they will effectively have been harmonised with pension funds, pension preservation funds and RAFs. As a consequence of this harmonisation, members of retirement funds will be able to transfer their benefits tax-free to a much wider array of retirement funds after T-Day, giving them more options to preserve and consolidate their retirement benefits.
For example, members of pension funds who leave employment will now be able to transfer their benefits. to a provident fund tax-free, consolidating both types of benefits in one fund. In short, retirement fund members, employers and fund administrators will have the opportunity to consolidate benefits and rationalise different types of retirement funds, which may lead to simplification of administration and a reduction in running costs.
PRE-RETIREMENT WITHDRAWALS DUE TO EMIGRATION
The third change arises from the phasing out of exchange control and the concept of emigration from T-Day. This will impact members of RAFs, pension preservation funds and provident preservation funds who are currently able to take pre-retirement withdrawals from those funds when they emigrate.
For those members who have already formally emigrated for purposes of exchange control or whose applications have been sent to the South African Reserve Bank or other approved banks by 28 February 2021 (and are subsequently approved by SARB within the year), the rules won’t change, and they will still be able to take preretirement withdrawals without delay.
However, for those members who have not formally emigrated or have not applied to emigrate by T-Day, the new rules will not be based on emigration itself, but on the status of the tax residence of that member.
Members will have to prove that they have not been a South African tax resident for an uninterrupted period of three years, before they can take such a pre-retirement withdrawal.
Allowable pre-retirement withdrawals taken for other reasons will be unaffected by the changes. For example, members of pension preservation funds and provident preservation funds will still be able to take their one allowable full or partial pre-retirement withdrawal. RAF members will still be able to take a pre-retirement withdrawal if the total value of their benefit is less than R7000. They will also be able to take pre-retirement withdrawals if they are not South African residents who departed from South Africa at the expiry of a specific working or visitor’s visa.
MAKING IT WORK FOR YOU
This latest set of retirement fund reforms provides retirement fund members with the opportunity to revisit their investment portfolio and to simplify, consolidate and preserve retirement benefits in ways which they may not have been allowed to do before.
Retirement fund members are urged to consult their Financial Adviser to understand how these changes impact them so that they can make informed choices about their savings and financial freedom during retirement.