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Update on Retirement Reform Proposals

A recently published article on SA Government Online addresses public concerns “…fuelled by rumours that Government will take away people’s hard-earned pensions and prevent them from accessing their funds.”

“These rumours are based on a misunderstanding of Government’s proposals. We would like to assure citizens that Government has no intention to nationalise people’s pension/provident funds or prevent them from accessing their money.”

“The proposed retirement reforms, including those relating to preservation of savings, are aimed at ensuring that pension fund members are better protected and can retire comfortably.”

“Government is proposing important measures to lower charges on the pension funds of workers, to ensure that they maximise their pensions. It wants to encourage workers to keep their savings until they retire and to convert some of their retirement savings into income at retirement. Currently, only an estimated 6 per cent of South Africans are able to maintain their lifestyle and replace their income fully at retirement.”

“It will take government at least two years before the proposals become law.”

What are the aims of the proposed retirement reforms?

  • To encourage employees to save and provide adequately for retirement to ensure that they retire comfortably and have income that lasts for their retirement lifetimes.
  • To encourage employers to provide retirement saving plans to their employees as part of the employment contract.
  • To ensure that employees receive good value for money for their retirement savings and are treated fairly, and that their savings are prudently and diligently managed, and are kept informed of their retirement savings.
  • To improve standards of retirement fund governance, including trustee knowledge and conduct, and the protection of members’ interest.

Some of the important practical aspects highlighted are:

Encouraging preservation during employment to enable a comfortable retirement
Government’s proposals seek to encourage pension fund members to preserve their money in their own funds (with old or new employer), or with a financial institution when they change jobs, and to also allow some access to the funds. Importantly, the public is assured that, should these preservation proposals become law, the legislation will not be implemented retrospectively.

Encouraging annuitisation to enable a better income in retirement
Government seeks to encourage members of provident funds to take a major portion of their retirement money as monthly pension payments, rather than a once-off lump sum. All provident fund members will, therefore, still be able to take all their retirement money they would have accumulated up to 1 March 2015 as a cash lump sum when they go into retirement.

How far is the retirement reform process?
March 2015, the equalisation of the tax treatment of contributions into retirement funds (i.e. pension, retirement annuities and provident funds) will become effective.

Which reforms are related to provident funds?
Provident fund members will be required to convert at least two thirds of their retirement savings into an annuity or pension when they reach retirement, instead of a once-off large sum of cash. In addition, members of provident funds will also enjoy the same tax deduction on their own contributions as currently applied to contributions by pension fund members

How will the new legislation affect provident fund members?
All provident fund members will still be able to take all their retirement savings that would have been accumulated as at 1 March 2015 as a cash lump sum whenever they go into retirement. The conversion of a portion of the retirement money into income at retirement will only apply to new contributions made by those who are younger than 55 when the new rules come into effect. This means that members who are 55 years and older on 1 March 2015, when the new rules come into effect, will not be affected. They will also be able to take contributions made after the new rules are implemented as a cash lump sum in retirement.

Workers who are below 55 years on 1 March 2015, will not be asked to annuitise or take a pension on the portion of new contributions if the total of those new contributions is less than the R150 000 (“de minimis rule”) threshold when they reach retirement. Irrespective of age, whatever a member has accumulated in the provident fund as at 1 March 2015, will be available to them as a cash lump sum when the person retires (i.e. protection of vested rights).

Impact of reforms on members of the Government Employees Pension Fund (GEPF) and other Government related retirement funds
The GEPF is a pension fund; changes related to provident funds will therefore not affect members of the GEPF. However, given the introduction of a higher cap for tax deductions, members of the GEPF will now also be able to contribute more for retirement purposes.

What is Government’s proposal on preservation?
Government is proposing partial preservation only in respect of new contributions after new legislation comes into effect. Limited withdrawals will be allowed and accumulated savings on date of implementation of legislation will not be affected.

Please click here to access the full Treasury document.

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