By Wesley Grimm, Joon Chong and Sam Varrie
The mandatory annuitisation of provident funds, which was first proposed in 2013 in the Taxation Laws Amendment Bill, 2013 (2013 Bill), finally became a reality from 1 March 1 this year, after a historic agreement with all Nedlac constituencies.
Previously, only pension fund and retirement annuity fund members were required to annuitise two-thirds of their retirement interest upon retirement. This applied unless a member's interest in a retirement fund was less than R247 500, where the full amount could be withdrawn as a lump sum on retirement.
The explanatory memorandum that accompanied the 2013 Bill suggested that a “strong link" existed between the inadequate retirement funds held by members of provident funds after their retirement and lump sum payouts to provident members on retirement.
The purpose of the change was to ensure provident fund members had a secure source of income during retirement and that retirement interests were not depleted too quickly. Significantly, it was also to harmonise the treatment of the three different forms of retirement funds in South Africa, namely pension funds, provident funds and retirement annuity funds.
Labour unions initially challenged the proposed compulsory annuitisation of provident funds. It was also later noted, during the standing and select committees on finance's discussion on the Revenue Laws Amendment Bill, 2016, that a misconception arose that the proposal to annuitise provident funds was an attempt by the government to nationalise provident funds.
Consequently, the implementation of the mandatory annuitisation of two-thirds of provident fund payouts on retirement was postponed multiple times, until it was finally announced in Parliament last year that the change would be effective from March 1 this year. This was confirmed by Finance Minister Tito Mboweni during the 2021 Budget Speech.
Impact
With effect from March 1 and subject to certain conditions and provisos, no more than one-third of the total value of a member's interest in a provident fund may be commuted for a single, lump sum payment and the remainder must be annuitised.
This general rule will not apply where two-thirds of the total value of a member's interest does not exceed R165 000, the member is deceased, or the interest is transferring to a preservation or retirement annuity fund.
The general rule is subject to several provisos, including that the interest held by provident fund and provident preservation fund members who are 55 or older on March 1 will be unaffected. Their additional contributions and fund returns will also be unaffected by the amendment.
In any other case, the interest and fund returns of members of provident funds or provident preservation funds who were members on or before March 1 will be unaffected by the change, as will additional amounts credited. Only contributions made from March 1 will be affected by the general rule.
The implementation of the mandatory annuitisation of two-thirds of provident fund payouts on retirement (that is the general rule discussed above) forms part of the government's plan to ensure that provident fund and provident preservation fund members access their retirement funds sustainably and is to be welcomed.
However, the significant and unnecessary delay in its commencement means that many people may have withdrawn and spent their interests in full in the intervening period.
Wesley Grimm, Joon Chong and Sam Varrie from Webber Wentzel
*The views expressed here are not necessarily those of IOL or of title sites
PERSONAL FINANCE