The Taxation Laws Amendment Bill, announced in Parliament late last year, introduces new tax rules regarding the annuitisation of provident funds which will come into effect on 1 March 2021.
A recent opinion article by Deirdre Phillips, Aneria Bouwer and Mogola Makola of Bowmans reminds us that these rules were first proposed in 2013 and formed part of the process to harmonise the tax treatment of the different kinds of retirement funds. “These proposals (referred to as the T-Day reforms) were originally intended to come into effect on 1 March 2015. However, there was an outcry from some parts of South Africa that the Government was trying to nationalise retirement funds, which led to a delay in the introduction of some of the proposed changes.”
The introduction of the Bill now confirms that the compulsory annuitisation of provident fund and provident preservation fund retirement benefits, will go ahead on 1 March 2021. “To complete the harmonisation process, benefits from contributions made to provident funds from 1 March 2021 onwards will be subject to the same rules at retirement as pension fund benefits, except where provident fund members are 55 or older on 1 March 2021 and remain members of the same provident fund(s),” Shaun Duddy of Allan Gray clarifies.
But what will the changes mean for existing as well as new provident and provident preservation fund members? Duddy explains:
Changes for existing members
“For members of provident and provident preservation funds on 1 March 2021, all benefits in these funds as at 28 February 2021, plus any future growth on these benefits, will not be impacted by the changes. These benefits will be given “vested rights”, meaning that members will still be able to take up to 100% of these “vested benefits” in cash at retirement, if required. These vested rights will continue to apply even if members transfer these vested benefits to other retirement funds before they retire, including if they transfer these benefits to pension, pension preservation or retirement annuity funds. The changes will also have no impact on the access that provident and provident preservation fund members have to their benefits before retirement.
In addition to the vested rights on existing benefits as at 28 February 2021, if existing provident fund members are 55 or older on 1 March 2021, and remain members of the same provident fund(s), they will also receive vested rights on their benefits from new contributions made to these funds from 1 March 2021 onwards.
For existing members younger than 55 on 1 March 2021, the changes will therefore only impact benefits from new contributions made from 1 March 2021 onwards. For existing members 55 or older on 1 March 2021, the changes will only impact new contributions made to provident funds joined for the first time after 1 March 2021, as these contributions will not receive vested rights. Members will be required to use at least two-thirds of these “unvested benefits” to purchase a product that will provide them with an income in retirement, unless their unvested benefits in a retirement fund are less than R247 500, or whatever this amount may be in future as stipulated in the retirement fund laws.”
Changes for new provident fund members
“Members of all ages who start contributing to provident funds for the first time after 1 March 2021, will immediately be subject to the new laws, i.e. all of their benefits will be unvested. Both at and before retirement, these new members’ benefits will experience the same benefits and rules as if they were in a pension fund.”
“The harmonisation of provident and provident preservation funds with pension and pension preservation funds is part of the National Treasury’s broader retirement reform initiatives, and aims to enhance the preservation of retirement fund benefits so that retirement fund members are able to provide a better income for themselves in retirement, which we believe is a good thing,” Duddy concludes.
It appears that concessions were made to appease the unions who were very outspoken in their criticism of the original proposals. It is possibly a fair trade-off, but delays the government’s intentions, when it proposed the legislation in 2015, by decades.
Click here to download the Allan Gray insight article.
In a recent Moneyweb article, a reader asks: “Will I be able to draw all the cash from my pension preservation fund after March 2021?” Click here to read the answer provided.