Fast little loans
Don’t rush out and do something silly such as resign from your job or get divorced just so that you can get your hands on the cash in your retirement fund in the wake of government’s latest proposals on how retirement savings must be preserved. That’s what many people did when government first announced, in 2006, that it planned to reform the retirement-funding system.
False rumours were spread that fund members would lose their existing (or vested) rights. Low-income members of provident funds were particularly concerned that they would not receive a social old-age grant (Soag) if they retained their often meagre retirement savings to buy a pension.
In reaction to government’s initial proposals, many people resigned so they could get their hands on their money, and many were left unemployed.
This time, government has gone out of its way to spell out how your existing rights will not be affected; and it has proposed some significant measures to ensure that fund members do not take financially damaging steps, such as resigning from their jobs.
The four most important additional proposals are:
* Doing away with the means test for the Soag. This will result in everyone receiving the grant, although it may be included in their taxable income. This will not affect most low-income earners, because, in many cases, their pensions plus the Soag will be below the tax threshold, or they will be on the lowest rates of marginal income tax.
* Members of provident funds who are older than 55 on T-day (the date from which it will be compulsory to purchase a pension with any new provident fund savings) will not be required to purchase a pension using any of their retirement savings at retirement, provided they remain in the same provident fund until the day they retire. So if you are 55 on T-day but retire 10 years later, you will still be able to take 100 percent of your savings as cash, subject to tax.
(Note: If you use your provident fund savings to buy a compulsory purchase annuity, you will score tax-wise, because there is no income tax, capital gains tax or withholding dividends tax on the investment returns. You will also avoid any lump sum taxation, which means you will earn tax-free returns on your invested capital until you receive the pension, when it will be taxed as income at your then marginal rate of taxation. This is already possible.)
* The de minimis amount at which you are required to annuitise (purchase a pension) will be raised from R75 000 to R150 000. This means if your total retirement savings from any single source are below the de minimis amount, you do not have to use two-thirds of your savings to buy a pension. You can take all the money as cash, subject to lump- sum taxation.
* A change to the rule of being allowed to make only one withdrawal from a preservation fund. Currently, a withdrawal can be anything between zero and 100 percent of your balance. This has two consequences:
- Members who leave their funds when they resign, or are fired or retrenched, withdraw too little cash and are left in desperate financial need and unable to access their remaining savings when they are still unemployed months later; or
- Members withdraw all their savings, and often spend the money, and are left destitute when they cannot find another job.
The proposed change will allow retirement fund members to have ongoing access to their preserved retirement savings to ensure they have a cash flow during what may be long periods of unemployment. The proposed cash flow amount is the greater of the Soag (R1 260 a month from April 1) or 10 percent of the initial transfer to a preservation fund from P-Day (the date on which the preservation rules change for retirement funds).
The existing rights that will be protected include:
* The savings balance in your pension or provident fund on P-day, plus any growth earned on that balance up to the date on which you leave your fund, will not be subject to the new rules that govern the preservation of savings. You will be able to access this amount, in cash, at any time after you leave your fund or join the proposed preservation section of a retirement fund.
* If you belong to a preservation fund on P-Day, your initial deposit will be deemed to be equal to the value of your preservation fund on P-Day, and vested rights will apply to this amount if you have not taken advantage of the provision to make a single withdrawal. If you have used your single withdrawal, vested rights will not apply. So, if you have made a single withdrawal, the balance will become subject to the same rules that apply to any new savings made from P-Day.
However, for preservation to work properly, government has to do more to halt reckless lending, particularly in the unsecured lending space, where interest rates are far too high and the abuse of consumer credit assurance is simply appalling. The practices amount to legalised loan shark operations.
Reckless lending is creating a generation of consumers who are ensnared in debt. As long as this is the case, over-indebted retirement fund members will continue to resign from their jobs or get divorced in a desperate attempt to get their hands on their retirement savings.
Reckless lenders must be made to take a lot of pain for what they are doing to impoverish people.
EXAMPLE: PRESERVATION RULES
Here is an example of how the new rules on preservation will apply to an existing member of an umbrella retirement fund:
Busisiwe is a member of the Consolidated Umbrella Fund. On P-Day, her balance in the fund is R450 000. Two years after P-Day, this balance has grown to R500 000. The contributions that she made to the fund after P-Day, and the growth on these contributions, are worth an extra R100 000. Busisiwe’s total balance is therefore R600 000 – the total of R500 000, which represents her vested rights portion, plus R100 000.
At this point, Busisiwe leaves employment. Her balance of R600 000 is transferred to the Consolidated Preservation Fund (CPF).
At any time, Busisiwe may withdraw R500 000 from the CPF. In addition, for each year that Busisiwe stays in the CPF, she may withdraw the greater of the social old-age grant (Soag), or 10 percent of R100 000. Busisiwe chooses not to withdraw any money immediately.
After five years, the R600 000 deposit in the CPF has grown to R1 million. At this point, the Soag equals R22 000 a year. Busisiwe may now withdraw R500 000, plus the greater of five years x 10 percent x R100 000 or the sum of the Soag over the five years, which is R117 000.
She decides to take out R350 000. This leaves R650 000 in CPF.