Setting the record straight in terms of how the government’s proposed retirement reforms will affect you.
Over the last few weeks vested interests have tried to create fear and confusion around the proposed retirement reform. Between unions flexing their political muscle and alternative investment products trying to convince people not to use retirement products, South Africans hoping to make provision for their retirement have been left in a mire of confusion. So it is worth going back to the facts.
Retirement reform will not increase costs
A property investment company issued a press release warning of higher costs for retirement funding due to the reforms. This is blatantly false – if anything these reforms will lower costs. Firstly National Treasury is investigating the cost drivers behind retirement funds and could even mandate the maximum fees that can be charged. Secondly, as more people enter the retirement net and more people preserve, so costs will be reduced due to economies of scale.
Only limited preservation will apply
Only around 3% of people preserve money for their retirement and this is having a serious impact on their ability to retire comfortably. Rather than opting for a 100% compulsory preservation, however, National Treasury is looking at measures to encourage people to preserve their company retirement funds when changing jobs by providing better information to members as well as automatic defaults which would make it easier and less expensive to preserve funds.
Government has also recognised that some people will need to access funds due to hardship and this will be considered in any legislation around preservation, so that retirement fund members will still be able to access a portion of their funds. This could actually be advantageous to members of retirement annuities outside of a company retirement fund. Currently members of retirement annuities cannot access their retirement funds until age 55. Once the new legislation is introduced around preservation, it will be standardised across all retirement products and therefore members of retirement annuities could potentially access some funds in the case of financial difficulty.
As a result of rumours doing the rounds that government is trying to nationalise pension fund assets, National Treasury issued a statement that “government is not proposing that people’s current and new retirement savings be kept, saved or preserved with Government (construed as “nationalisation”) or be used to fund Government projects (referred to as “prescribed assets”).”
Government is still consulting the public on preservation of retirement funds and any legislation is only expected to come into force in the next two years.
None of these changes affect your current retirement savings
Due to mis-information, many people are considering cashing in their retirement funds now in the fear that they will not be able to access them in the future. This is not true as all funds accumulated to date will not be subject to the new rules. Any change to retirement fund rules will only apply to future contributions and will not affect any existing retirement savings – this is called “protection of vested rights.”
In terms of preservation, this means members of a company retirement fund would be able to access all the money they would have saved up to the date of the new legislation. If your fund is worth R500 000 at the time of the new legislation you would still be able to withdraw R500 000 when changing jobs.
The protection of vested rights would also apply at retirement. New legislation that will come into effect on 1 March 2015 will standardise the treatment of provident, pension and retirement annuities at retirement. Technically this means members of provident funds would only be able to take one-third cash at retirement and the remaining two-thirds will be used to provide an income during retirement. However this does not apply to any funds accumulated in a provident fund up to 1 March 2015. For example if you have saved up R1 million in a provident fund by the end of this year, you will still be able to withdraw the full R1 million at retirement, irrespective of what your final retirement fund is worth.
Moreover the new rules do not apply to any future contributions if you are already 55 years old, which means that if you are 55 years or older on 1 March 2015 and a member of a provident fund, you will be able to withdraw all your funds on retirement; if your retirement fund is worth less than R150 000 at retirement you will also be able to take all your retirement funds as cash. So there is no need to panic and cash in now if you are close to retirement – there will be no benefit and you will simply lose a lot of money in taxes.