On 1 March 2021 the Taxation Laws Amendment Bill of 2020 came into effect. It contains changes that have a direct impact on the members of provident funds.
These changes are part of a process to simplify the retirement fund industry and bring provident funds in line with the legislation governing pension funds and retirement annuities.
Currently members of pension funds and retirement annuities must use at least two-thirds of their retirement savings to buy an annuity that will pay them an income in retirement. They can only make a full withdrawal if the fund value is less than R247 500.
Until now this rule has not applied to provident fund members who have, at retirement, been able to withdraw their full retirement benefit, less tax.
However, this changed on 1 March. Now, provident fund members will also be required to purchase an annuity at retirement.
What is important for provident fund members to understand is that their vested rights remain protected. This means the new rules only apply to new contributions from 1 March 2021 onwards, not existing provident fund values.
All the money a provident fund member has already accumulated in their fund, plus all future growth on that money, will not be subject to annuitisation and could be taken as a lump sum.
For example, if the member has a provident fund value of R1 million on 28 February 2021, that amount plus all growth on the R1 million could still be paid out at retirement as a lump sum.
The same would apply to any money that a member had transferred to a provident preservation fund before 1 March. These funds would not be subject to annuitisation and could be taken as a lump sum on retirement.
The new rules will also not apply if on 1 March the provident fund member was 55 years or older and remains a member of the same provident fund.
However, 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.
It is important to note that these changes have no bearing on members of retirement annuities or pension funds including the Government Employee Pension Fund.
There has been some misinformation around having early access to retirement funds as of 1 March. This is not the case. National Treasury has confirmed that no legislation has yet been passed allowing members to access their retirement funds in the case of financial difficulty.
While this has been discussed, along with other measures to support retirement outcomes, legislative changes had not been put in place by 1 March 2021.
Make sure you understand how your retirement fund works and plan accordingly.