Phased retirement and provident funds

Published Aug 3, 2014

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The proposed introduction of phased retirement will ultimately benefit members of provident funds, because they will have to buy an annuity with two-thirds of the contributions paid into their fund after March 1, 2015.

Currently, provident fund members can withdraw all of their retirement fund savings as a cash lump sum at retirement. Although this will change next year, provident fund members will retain the right at retirement to withdraw as a lump sum what they have saved by March 1 next year.

For example, a provident fund member turns 45 on March 1 next year and has accumulated R237 000 by then. When he retires at 60 in 2030, the member has accumulated an additional R210 060 (total savings of R447 060). He will be entitled to take up to R307 020 as a cash lump sum (R237 000 plus one-third of R210 060, or R70 020). He must use the remainder of his savings, R140 040 (two-thirds of R210 060), to buy a monthly annuity.

In addition, members who are over the age of 55 on March 1 next year will be allowed to withdraw all of their savings in cash on retirement.

Provident fund members will also still be able to take their entire benefit in cash if they save less than R150 000 – referred to as the de minimis threshold for annuitisation – between March 1, 2015 and the date on which they retire.

For example, a member of a provident fund is 50 years old on March 1 next year and has saved R280 080 at that date. He saves another R140 040 by the time he retires at 60 in 2025. He will be entitled to take the entire benefit of R420 020 as a cash lump sum, because R140 040 is less than R150 000.

Change misunderstood

Many members of provident funds have misinterpreted the change that will be introduced next year. In a recent statement, National Treasury says there are rumours that the government plans to take away people’s hard-earned pensions and prevent them from accessing their funds.

Dismissing the rumours as a misunderstanding of its intention, National Treasury says that unless provident fund members save their cash withdrawals in a way that provides for an income for the duration of their life, they are vulnerable to poverty in retirement.

The government wants to encourage members of provident funds to take a major portion of their retirement savings as a monthly pension instead of as a once-off lump sum, and this is why the amendment to the law will take effect from March 1 next year, Treasury says.

Treasury points out in its statement that it is still consulting on proposals to amend the law to force you, as a member of a retirement fund, to preserve most of your savings until retirement, rather than withdrawing these when you leave a job.

It says it will take the government at least two years before mandatory preservation is made law, and it will apply only to contributions made after the law takes effect.

National Treasury also says the government is not proposing that your retirement savings must be kept, saved or preserved with the government (construed as “nationalisation”) or used to fund government projects (referred to as “prescribed assets”).

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