The Taxation Laws Amendment Act includes changes to the legislation that governs provident and provident preservation funds that will come into effect on 1 March 2021. The changes, which are part of the National Treasury’s broader retirement reform initiatives, have been on the cards for some time and are the final planned step in the process of aligning (also referred to as “harmonising”) the benefits and rules of provident, provident preservation, pension, pension preservation and retirement annuity funds. Shaun Duddy provides context to the changes and what they will mean for members of provident and provident preservation funds.
With industry surveys consistently indicating that fewer than 10% of South Africans are able to support themselves financially in retirement, the National Treasury, in consultation with the savings and investment industry and other stakeholders, has implemented a number of changes to retirement legislation in the last decade. These have been aimed at encouraging adequate provision for retirement and ensuring that available retirement products meet the needs of South African savers.
Harmonisation of provident, provident preservation, pension, pension preservation and retirement annuity funds has been part of this broader retirement reform process and aims to encourage increased saving for retirement, and preservation in retirement income products (i.e. annuities) at retirement, by making changes to and aligning the benefits and rules of these retirement funds.
We believe harmonisation is a positive step towards improving retirement outcomes
Legislative amendments for harmonisation first appeared in 2013 and consisted of three sets of changes:
1. Aligning and significantly increasing the level of retirement fund contributions that are tax-deductible
To encourage increased savings in retirement funds, the tax incentives to do so were significantly increased from 1 March 2016. The level of contributions that are tax-deductible was aligned across retirement funds and increased to up to 27.5% of taxable income or remuneration per year, whichever is higher, subject to a maximum of R350 000 per year. This represented a significant increase from the previous 15% of non-retirement funding income.
2. Increasing the amount below which retirement fund members can take up to 100% of their benefits in cash at retirement
From 1 March 2016, members of pension, pension preservation and retirement annuity funds with benefits of R247 500 or less at retirement have been able to take up to 100% of their benefits in cash, if required. The increase from R75 000 was made in anticipation of the third and final set of changes (see below), and allows certain members to access a greater percentage of their retirement fund benefits in cash at retirement.
3. Aligning the requirements to purchase an annuity at retirement
These are the final changes to provident and provident preservation funds, which will become effective on 1 March 2021. As things stand, a key difference between provident and provident preservation funds and pension, pension preservation and retirement annuity funds is that provident and provident preservation fund members can take up to 100% of their benefits in cash at retirement, if required, while pension, pension preservation and retirement annuity fund members are required to use at least two-thirds of their benefits to purchase an annuity, unless their benefits in a retirement fund are R247 500 or less.
To complete the harmonisation process, benefits from new contributions made to provident funds from 1 March 2021 onwards will be subject to the same requirements to purchase an annuity at retirement, except if provident fund members are 55 or older on 1 March 2021 and remain members of the same provident fund(s). These changes will start to increase preservation at retirement through the use of annuities, which are intended to provide retirees with an income in retirement. In addition, these changes are being introduced in a way that protects the rights that were applicable to provident and provident preservation fund members’ past contributions, as well as defined future contributions for provident fund members close to retirement.
These improvements have … also been introduced in a manner that clearly acknowledges the reasonable need for access to cash at retirement
We believe harmonisation is a positive step towards improving retirement outcomes. The combination of increased savings in retirement funds, encouraged by significantly increased tax incentives, and the increased use of annuities to provide an income in retirement, ensured by aligning the requirements to purchase an annuity at retirement, should improve the level of benefits at retirement, as well as the level and sustainability of income in retirement. These improvements have, however, also been introduced in a manner that clearly acknowledges the reasonable need for access to cash at retirement, and the importance of not taking away rights that were previously promised to retirement fund members.
While there have been numerous delays in effecting all the elements of harmonisation, the final step is now around the corner. With 1 March 2021 fast approaching, it is the ideal time for provident and provident preservation fund members to get to grips with what the upcoming changes will mean for them in practice.
What will the changes mean in practical terms for existing members?
For members of provident and provident preservation funds on 1 March 2021, all benefits in these funds as at 28 February 2021, plus any future growth on these benefits, will not be impacted by the changes. These benefits will be given “vested rights”, meaning that members will still be able to take up to 100% of these “vested benefits” in cash at retirement, if required. These vested rights will continue to apply even if members transfer these vested benefits to other retirement funds before they retire, including if they transfer these benefits to pension, pension preservation or retirement annuity funds.
The changes will also have no impact on the access that provident and provident preservation fund members have to their benefits before retirement.
In addition to the vested rights on existing benefits as at 28 February 2021, if existing provident fund members are 55 or older on 1 March 2021, and remain members of the same provident fund(s), they will also receive vested rights on their benefits from new contributions made to these funds from 1 March 2021 onwards.
For existing members younger than 55 on 1 March 2021, the changes will therefore only impact benefits from new contributions made from 1 March 2021 onwards. For existing members 55 or older on 1 March 2021, the changes will only impact new contributions made to provident funds joined for the first time after 1 March 2021, as these contributions will not receive vested rights.
Members will be required to use at least two-thirds of these “unvested benefits” at retirement to purchase an annuity, which will provide them with an income in retirement, unless their unvested benefits in a retirement fund are R247 500 or less, or whatever this amount may be in future as stipulated in the retirement fund laws.
What will the changes mean for new provident fund members?
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 legislation, i.e. all of their benefits will be unvested and members will be required to use at least two-thirds of their benefits at retirement to purchase an annuity, which will provide them with an income in retirement, unless their benefits in a retirement fund are R247 500 or less, or whatever this amount may be in future as stipulated in the retirement fund laws.
Can members lose their vested rights?
As mentioned, vested rights will be given to existing provident and provident preservation fund members on 1 March 2021 and these vested rights will remain intact until retirement, even if the vested benefits are transferred to a different retirement fund. However, if any benefits are deducted from these members’ retirement funds before retirement, their vested benefits will be reduced as part of that.
In summary, from 1 March 2021, provident and provident preservation funds will be “equivalent” to pension, pension preservation and retirement annuity funds at the point of retirement, with the important exception of vested benefits, which will not experience any changes. The “equivalence” of provident, provident preservation, pension and pension preservation funds will also mean that any tax consequences of transferring pension and pension preservation fund benefits to provident and provident preservation funds will be removed.
How will this all work at retirement?
Let’s consider a member who is younger than 55 on 1 March 2021 and retires from their retirement annuity fund after 2021 with R3m. R2m is vested benefits, from benefits that were in a provident fund on 28 February 2021 and later transferred, and R1m is unvested benefits, made up of R250 000 from contributions to the provident fund from 1 March 2021 onwards and later transferred, and R750 000 from contributions to the retirement annuity fund. Of the R1m unvested benefits, the member will have to use at least two-thirds to purchase an annuity, which will provide them with an income in retirement1, while they will still be able to take up to 100% of the R2m vested benefits in cash, if required.
If this member were 55 or older on 1 March 2021, their vested benefits would be R2.25m, R2m from benefits that were in the provident fund on 28 February 2021, and R250 000 from contributions to the provident fund from 1 March 2021 onwards before transferring. In this case, the member would have to use at least two-thirds of their R750 000 unvested benefits to purchase an annuity, which would provide them with an income in retirement, while they would be able to take up to 100% of their R2.25m vested benefits in cash, if required.
Which of our clients will be impacted?
These changes will impact the members of the Allan Gray Provident Preservation Fund and Allan Gray Umbrella Provident Fund. We have been taking the necessary steps to effect the changes across all of our retirement funds, especially in relation to allocating vested rights to members, administering the vested benefits over time and reporting on the vested benefits. We will be communicating further details directly to our impacted members, employers and financial advisers in the coming weeks.