PLANNING POINTS:
By Hester van der Merwe
Retirement can be daunting. Not only does it signify a practical and highly emotional transition in life, but the financial implications are often nerve-wracking. Add to this the fact there are legislation changes looming in the first quarter of 2021 and we have all the ingredients for a full-blown panic attack.
Stop right there! Remember, knowledge is power. Once we’ve unpacked the changes and their implications, you’ll regain your sense of calm and control.
Pension or provident?
There are a baffling array of retirement instruments out there: provident funds, pension funds, preservation funds, retirement annuities… Let’s make this clear upfront: the only instruments affected by the legislation changes are provident and provident preservation funds. If you have a pension preservation fund or a retirement annuity – or both – then nothing will change.
Why the legal amendments? Well, reading the above paragraph should give you a hint. The retirement savings industry is overly complex and confusing for consumers. This, coupled with the scary statistic that only 6% of South Africans are able to retire, and you have a recipe for disaster.
Basically, by changing the law, Treasury wants to standardise the law pertaining to all the various financial instruments and ultimately make it safer for people in retirement.
What has changed?
Previously, if you had a provident or a provident preservation fund, you could draw 100% of the capital amount upon retirement. From March 1, 2021, however, members of these funds will have to purchase an annuity at retirement, which will provide you with a monthly income going forward. This is the same as if you retire with a pension fund or a retirement annuity.
You are still allowed to withdraw some of your provident savings in cash – up to a third of the fund value – but this is not compulsory.
People older than 55 are exempt
That’s the legislation change in a nutshell, but obviously real life is a little more complicated. You might be on the cusp of retirement, planning to use your existing provident fund as a lump sum pay-out. Take a deep breath and relax. The good news is that if you’re an existing member of a provident or provident preservation fund, all your all benefits in these funds as of February 28, 2021, plus any future growth on these benefits, will not be impacted by the legislation changes.
That’s not all. If you will be 55 or older on March 1, 2021, and you remain a member of the same provident fund, your future contributions will also not be impacted. The only time the new law will apply to people older than 55 is if you join a new provident fund for first time after March 1, 2021.
What about younger people?
When the new law comes into effect, all savings accrued in an existing provident fund will be referred to as “vested benefits” – your retirement fund will keep a separate account of this money. You will still be able to draw any vested benefits upon retirement as a lump sum, as per the law pertaining to provident funds before March 1, 2021. This will only fall away if you transfer your vested benefits to a different retirement fund before you retire.
It’s quite confusing, so here’s an example: Jason is 40 years old and a member of his employer’s provident fund. His fund value on March 1, 2021 is R2 million. This amount will represent his vested benefit; all contributions after the law change will be his unvested benefit. Now, assume that at retirement, Jason’s R2 million vested benefit has increased to R3 million. His unvested benefit – all the contributions and growth in the fund since March 1, 2021, totals R1.5 million.
When he retires, Jason will be able to withdraw the entire R3 million vested benefit as a lump sum. However, he will only be able to take R500 000 of the unvested benefit as a lump sum – one third of the total amount – and will be required to purchase an income with the remaining two thirds.
In summary, there’s no need to panic. The government is simply trying to provide an added layer of protection to retirement funds, which is a positive step. The real concern is that so few people in South Africa can look forward to a decent retirement. Saving for the future is critically important. If you’re not sure what your company offers regarding this, or if you’re self-employed and you want to streamline the process for maximum benefit in retirement, consult with a Certified Financial Planner (CFP) and cross that worry off your list.
Hester van der Merwe, CFP, is a financial planner at Ultima Financial Planners and the Financial Planner of the Year 2020/21.
PERSONAL FINANCE