You may soon be able to choose the date on which you retire from your employer-sponsored pension or provident fund, allowing you to delay the purchase of a monthly pension until a date long after you retire from employment.
The implementation of this measure from March 1, 2015 is proposed in the draft Taxation Laws Amendment Bill, which was presented to Parliament’s standing committee on finance this week.
The bill proposes that the date on which your benefit in a retirement fund accrues to you should not depend on the retirement date set by your fund – typically, the same date on which you retire from employment. Instead, you will be able to leave your savings invested in your occupational fund for as long as you want. For example, if you can continue working for five years after your retirement date, you can defer taking your retirement benefit as an annuity (monthly pension), and possibly as a lump sum, for five years.
Kobus Hanekom, the head of strategy, governance and compliance at Simeka Consultants & Actuaries, an affiliate of Sanlam Employee Benefits, says the proposed amendment introduces the principle of phased retirement and means you will not be forced to take a pension regardless of whether or not you need it.
Retirement fund members should have the flexibility to decide when to retire, for two important reasons: people are living longer in retirement and the world of work is changing, Hanekom says.
The life expectancy of fund members who reach the retirement age of 65 has increased to about 20 years, and it is expected to continue to increase.
The reality is that many members simply cannot afford to retire at their retirement age, and many others “have no intention of hanging up their boots and want to embark on a second career”, Hanekom says.
Fund members may pay a high price if they are forced to buy a pension when they reach retirement age, he says. Members who are projected to receive a pension of 55 percent of their income at age 60 could receive a projected pension of 79 percent of their income if they are allowed to take their retirement benefits five years later, he says.
John Anderson, the managing director of research and product development at Alexander Forbes, says that retiring later has several advantages:
* Your retirement savings will have more time to grow;
* You will earn more compound interest on the large amount you will have saved; and
* If you retire when you are older, it will cost less to provide an income by way of a guaranteed annuity or a living annuity.
Hanekom says the introduction of phased retirement is a significant development that will affect financial planning, because financial planners will be able to advise fund members who can afford to do so to postpone their retirement until interest rates are higher and the time is right to buy a guaranteed annuity. (Guaranteed annuities pay a pension for life, but the pension you receive depends on interest rates when you buy the pension with your retirement savings.)
He says phased retirement will affect funds that use life-stage investing – your savings are invested more conservatively as you approach retirement – and will result in strategies for the optimal time to buy an annuity.
Pension fund members must use at least two-thirds of their fund savings to buy an annuity, while up to one-third can be taken as a cash lump sum. Provident fund members will be subject to a similar law from March 1 next year.
In the explanatory memorandum to the draft Taxation Laws Amendment Bill, National Treasury says that you are expected before your date of retirement to choose how much of your retirement savings you want to take as a lump sum.
Your fund must apply for a tax directive from the South African Revenue Service (SARS) to determine how much tax to withhold from your lump sum.
The explanatory memorandum says problems can arise if you choose how much to receive as a lump sum only after your retirement date – the date on which your benefit accrues to you and the date on which your benefit is valued for the purpose of obtaining a tax directive from SARS.
It also says that if you decide only after the date on which you retire how much of your benefit to take as a lump sum, your fund may fall foul of its statutory obligation to withhold tax from your benefit.
Hanekom says that if the amendment to the Income Tax Act is passed into law, “retirement date” and “retirement interest” (your share of the value of the fund) will, as of March 1 next year, be defined with reference to the date on which you, the member, elect to retire.
In addition, the Act will be amended so that your retirement benefit will no longer be deemed to accrue to you at the retirement age stipulated by the fund, but when you elect to retire from the fund.
Hanekom says if the amendment becomes law, your pensionable income will be nil when you retire from your employment, and if you leave your savings invested in the fund, your employer will not contribute to the fund.
In most instances, if you retire from employment but stay invested in your fund, your group life assurance will fall away, Hanekom says.
He says an important question is whether you will be allowed to make contributions to your fund after you reach retirement age.
Hanekom says he surmises that if your fund’s rules currently allow voluntary contributions, you will be able to contribute after you reach retirement age.
If you embark on a second career after retirement and you are allowed to contribute to your fund, “the arrangement appears near perfect”, he says. This is because no commission is paid on the contributions and an occupational retirement fund is likely to have lower costs than an investment or fund for individuals.
Anderson says there is much uncertainty about the implications of Treasury’s proposal – such as how to deal with risk benefits and additional voluntary contributions – that will have to be addressed before the law is amended.
You are usually eligible to belong to an employer-sponsored fund because you are an employee, and this requirement will have to be addressed to allow you to remain a member after retirement, he says.
Hanekom says if your fund’s rules do not make provision for the fund to levy fees in respect of benefits left in the fund after retirement, the fund may have to amend its rules to provide for this, but funds will have no choice but to allow you to leave your benefits invested.
You could consider transferring your savings to a retirement annuity before you elect to retire, but this is likely to have cost and commission implications, Hanekom says.
Defined benefit funds, which provide members with a pension based on their final salary and years of service, should make sure that their rules are clear on the benefit that will be paid at retirement, as well as the growth on that pension, if you choose not to retire from the fund when you reach your normal retirement age, Hanekom says.