How new regulatory reform initiatives affect retirement fund members

From March 1 2021 (referred to as "T Day"), two retirement reform initiatives took effect. These are the annuitisation of provident funds at retirement, and the enhanced tax-free transferability between retirement funds. What does this means for retirement savers?

The annuitisation of provident funds 

The new annuitisation rules primarily affect provident fund members younger than age 55 on March 1 2021. For these members, retirement contributions already made into the provident fund, plus investment growth earned on these contributions, accumulated up until February 28 2021, including any future investment growth on this accumulated amount up to the date of retirement, are regarded as vested benefits.

This means that this accumulated amount may be accessed as a cash lump sum at retirement. Alternatively, an annuity to provide a retirement income can be purchased with the accumulated amount at retirement if the member chooses this option.

Retirement contributions made into the provident fund from March 1 2021 plus investment growth on these contributions up to the date of retirement are treated differently and regarded as non-vested benefits. This means that at retirement, members can only access up to one-third of this accumulated amount as a cash lump sum, and the balance must be used to purchase an annuity to provide an income in retirement. If the non-vested benefits fall below R247,500, the full amount may be accessed as a cash lump sum at retirement.

Provident fund members aged 55 or older on March 1 2021 who remain in their current provident fund are still entitled to access their full retirement savings at retirement as a cash lump sum. Therefore, they are regarded as vested benefits. They may choose to purchase an annuity to provide an income at retirement with their accumulated savings, but this is not compulsory.

Alignment of tax-free transferability (or portability) between retirement funds

The annuitisation of provident fund benefits means that the distinctions between restrictive retirement funds such as pension funds, and less restrictive retirement funds such as provident funds, have fallen away. Therefore, members of pension funds can now transfer their accumulated retirement savings to provident funds tax-free.

Members of provident funds can transfer their accumulated retirement savings to pension funds tax-free, and this continues to hold. Members of pension funds can also transfer their accumulated retirement savings to provident preservation funds tax-free, and members of provident funds are able to transfer their accumulated retirement savings to pension preservation funds tax-free.

An important exception to this initiative is that savings from a retirement annuity fund can only be transferred to another retirement annuity fund.

Accumulated retirement savings may be transferred from a current provident fund to a new retirement fund in a number of situations, including:

• If a member resigns from their employer and joins a new employer, and the member chooses to transfer their accumulated retirement savings to the retirement fund of their new employer.
• If the company the member is working for liquidates, and the member chooses to transfer their accumulated retirement savings to a new retirement fund.
• If the company that the member is working for decides to terminate the existing fund and transfer the member’s accumulated retirement savings (via a section 14 transfer) to a new retirement fund. In this instance, the member will be viewed as a new member of the new fund, after March 1 2021.

In the scenarios above, the member may choose to transfer their accumulated retirement savings to a provident preservation fund, such as default preserver of the fund or any other preservation fund. In this instance, at retirement, they will be able to access this money as a cash lump sum as the full accumulated savings, and investment growth on this accumulated amount will be viewed as vested benefits.

If a member withdraws their money at any time before retirement, such as elects to take it as a cash lump sum, the full amount can be withdrawn. This will also remain applicable for members younger than age 55, as the new annuitisation rules have no impact on withdrawal benefits before retirement.

Liberty has developed a flow chart to help the public understand, based on your age and whether you have moved your savings into a new provident fund, how your accumulated retirement savings may be accessed at retirement.

This article was paid for by Liberty.