Demystifying the Annuitisation of Provident Funds
If you are a Pension Fund member, you're completely forgiven if you stop reading right now as this does not apply to you. Have a nice day!
If you are a Provident Fund member, stop right there, concentrate for a few minutes and make sure you understand how changes will affect you as a Provident Fund member - Pssssttt it is very important!
Let's start with the background, because you could have still been in school when the proposed changes were announced by Government in 2015, or you just didn't find it interesting. But now, it has a real impact on you, and it's definitely worth paying close attention.
In 2015 the government called it Retirement Reform, which aimed at lower costs and protecting savings prior to retirement. The changes made by Retirement Reform was called T-Day, which is just some fancy wording. So, what does T-Day have in store for you?
Let's dive into the general stuff about T-Day first:
- Retirement Reform rules only apply when the member retires - meaning you still have access to your retirement funding money in cash, when you resign, you are retrenched or dismissed. We don't encourage this behaviour, as we want to change to a savings culture in South Africa, so rather transfer tax-free if you can (speak to a registered Independent Financial Advisor) to help. If you do access the money in cash - find out about the tax you will pay. Remember SARS have their fingers in every pie.
- From 1 March 2021, your Fund administrator should have two records for you - one keeping the Provident Fund monies separate, still growing in terms of your investment portfolio and another record going forward - for the contributions made after 1 March 2021 - meaning Provident Funds will have the same Rules as Pension Funds from this date.
From 1 March 2021 - 3 different scenarios will exist for a member of a Provident Fund. Read each one carefully and if you still don't understand - get in touch with your Fund and insist that they come and explain to you. It is their job to keep you informed.
If your Fund isn't being pro-active, you should be - get in touch. Hassle them, make sure they provide you with accurate information, that will enhance the outcomes for you as a member on the Fund.
Okay, so here we are - below are a brief breakdown of each scenario. Use it to help you engage your Fund, your Employer and your Financial Advisor (Make them earn their cheese) - to help you make better decisions:
Scenario 1 - I Am Younger than 55 on 1 March 2021
If you are younger than age 55 on 1 March 2021, and you are in a Provident Fund, you will from this date going forward have two retirement pots.
Retirement Pot 1 - will be the old Provident Fund Benefit, they like calling it your "vested" benefit. It basically means your benefit in the provident fund cannot be changed, therefore they will ring-fence it, it will still grow with return until you withdraw or when you retire one day - you can access the full amount in cash. Again, not advisable and there are tax implications. Speak to your Fund and get HELP!!!
Retirement Pot 2 - will start effective 1 March 2021 - all money that you save in this pot going forward will fall under the pension fund rules, which means you can on retirement take 1/3rd in cash (tax applies) and 2/3rds must be used to buy you an income for old age. If this value is below R247 500 in Pot 2 on retirement - you can also access this amount in full - this is what is called the "de minimis rule" - very fancy word, just meaning that under that value of R247 500 you can access the full amount in cash.
And I'm bolding the next section for a reason - IF YOU WITHDRAW FROM THE FUND AT ANYTIME AFTER 1 MARCH 2021, WHETHER YOU ARE IN A PENSION OR PROVIDENT FUND, YOU STILL HAVE ACCESS TO YOUR MONEY IN FULL. THEREFORE YOU CAN CASH THE BENEFIT OUT - HOWEVER TAX IS APPLICABLE. SO, THE ABOVE DISCUSSION ONLY HAPPENS ON RETIREMENT! DON'T LET ANYONE ELSE FOOL YOU. YOU ARE NOW INFORMED.
Scenario 2 - I Am 55 Years or Older on 1 March 2021
If the above is the case, and you are contributing to a provident fund, you really like your Employer and you stay with them and the same provident fund until you retire, there will be no change for you.
All contributions before 1 March 2021, and after this date, will be added to the same pot of money, and you can access the full cash benefit on retirement. Yes, you are right, please speak to an independent financial advisor before you decide to take all your monies in cash. Tax is important, let the experts assist you on how you can get the best for YOU!!!
Scenario 3 - I am 55 Years or Older on 1 March 2021
However, what happens when you are older than 55, on 1 March 2021, you are saving in a Provident Fund, and due to not liking your current employer (ssshhh, we won't tell anyone) you transfer to a new employer and Provident Fund then there will be a change on how the benefit is paid to you.
Again, we go back to the two different retirement pots:
- Retirement Pot 1 - All your money saved in this pot prior to the transfer will be accessible in cash, and yes tax applies, and yes, only at retirement.
- Retirement Pot 2 - All the money you save in this pot after the transfer until you retire, will be available as follows - 1/3rd can be taken in cash and 2/3rds must be used to buy you an income for old age. If this retirement pot value is under R247 500 (that ugly "de minimis rule" word) you can access the full amount in cash, yes tax is applicable and, yes only at retirement.
If you decided to skip all of the above (naughty) at least inform yourself and speak to someone about these retirement changes called T-Day Reform. Trust me, you will thank me later.
As a parting shot!!!!
PLEASE, THIS ONLY APPLIES TO PROVIDENT FUND MEMBERS, IT ONLY APPLIES ON WHEN YOU RETIRE. IF YOU LEAVE THE FUND IN TERMS OF RESIGNATION, RETRENCHMENT OR DISMISSAL - YES, THE FULL AMOUNT IN THE POT, AT THE TIME, WILL BE A BENEFIT FOR YOU, AND CAN STILL BE ACCESSED IF YOU ARE PREPARED TO PAY THE TAXMAN HIS BITE OF THE CHERRY.
Stay tuned for different topics on your retirement fund at work. Simple, basic and informed. And don't be scared, ask questions. It's the right thing to do!!