Government wants you to preserve your retirement savings for an income in retirement.
But very few retirement fund members do so.
So National Treasury has published a discussion document outlining a number of options ranging from maintaining the the status quo to the strict compulsory preservation of your retirement savings until you retire.
Treasury says in the paper that cashing in your accumulated retirement savings prematurely erodes security in old age, undermines the alleviation of chronic poverty, and increases reliance on state grants and family members.
It points out that currently withdrawals from retirement savings products in South Africa are treated differently. Members of occupational pension and provident funds are allowed to take their retirement savings as a cash lump sum on withdrawal from a fund before retirement, but those using retirement annuity (RA) funds are barred from withdrawing their savings even in cases of financial hardship.
“A glaring omission in law is that preserving retirement assets on a change of job is not mandatory,” the paper says.
Treasury, however, acknowledges there might be a need to allow access to accumulated retirement savings in limited circumstances, because there is no comprehensive social safety net for formally employed middle-income employees, leaving them vulnerable, for example, on retrenchment.
The problem is exacerbated by the country’s high unemployment rate.
Treasury has made general proposals that:
* All pension funds should be required to create a preservation section within the fund and, as the default option, transfer savings to a preservation fund when a member leaves employment, unless the member has specifically indicated they want to move their savings to another fund or withdraw their pension in cash.
* Members who opt to withdraw funds as cash before retirement should be required to first seek advice.
It has also provided five different options for discussion, namely:
* The status quo. This will continue to allow full access to retirement savings when leaving employment before retirement, but with the tax on withdrawals that is above current levels to discourage you from withdrawing.
* A three- or five-year default monitoring period. This option will allow for a certain period (three or five years) for monitoring a default arrangement. The arrangement will require employees changing jobs to be defaulted into a preservation fund, unless they elect to withdraw. Any withdrawal would be subject to compulsory advice. If there is no noticeable change in behaviour, namely increased preservation of retirement savings during the period, then stricter legislation will be introduced.
* Partial withdrawal. This option will allow access to a maximum of one-third of accumulated savings before retirement. All withdrawals will be taxable. The one-third would be cumulative – that is, once you have the one-third you will not get it again. This provision could be extended to pre-retirement access to savings in RA and preservation funds.
* A maximum monthly income. This option will allow access to a certain amount every month while a member is unemployed, subject to certain limits. Treasury proposes an income that is the lesser of R5 000 or three percent of the fund’s accumulated balance a month. Again, Treasury suggests this could apply to RA and preservation funds.
* Full preservation. This option requires full preservation of new contributions made after the proposals are adopted and allows no withdrawals before retirement.
Three options on the table for future of provident funds
Provident funds, which allow you to take all your retirement savings as a cash lump sum at retirement, are unlikely, in the long-term, to survive government’s reforms of the retirement-funding system.
In its discussion document on preserving retirement savings, National Treasury says that provident funds were developed primarily to provide a cash lump sum at retirement, rather than a monthly pension.
It says there is now a strong rationale for encouraging people to use their retirement benefits to purchase a pension at retirement.
But it concedes that persuading provident fund members “to annuitise a portion of their benefit poses certain challenges. For example, employees say they prefer provident funds to defined benefit funds, which they mistrust.”
One of the problems facing National Treasury is that many low-income wage-earners cash in their retirement savings and then rely on the state old-age grant for an income in retirement.
National Treasury has proposed for discussion the following options for the future of provident funds:
* Retain the status quo. No changes are adopted – members who retire from provident funds will be permitted to access their benefits as they do under the current dispensation.
But no new provident fundswill be allowed, following the harmonisation of the taxtreatment of contributions to retirement funds.
* Preservation of existing, vested rights. The value of the fund credit accrued at the date on which amending legislation is implemented will be paid out as a cash lump sum on retirement. But the investment growth on this amount and any new contributions will be subject to the same rules that govern the retirement benefits of pension funds: namely, a minimum of two-thirds of the accumulated savings must be used to buy a pension for life.
A de minimus rule (the minimum amount required) will be considered for accumulated savings with which it may not be practical to buy a pension. The current amount of R75 000, below which you do not have to use your savings to purchase a pension, is likely to be doubled to R150 000.
National Treasury says if this option is implemented, it will have little effect on members of provident funds for many years.
* Phased-in option. A sliding scale structure will be introduced that will result in the gradual conversion of provident funds to pension funds, while the existing rights of provident fund members who are aged 50 or older at the date on which amending legislation is implemented will be protected.
The sliding scale will allow provident fund members who are 50 or older and closer to retirement when the legislative changes are implemented to take a larger portion of their retirement savings as a cash lump sum at retirement.
For example, a fund member who is one year from retirement when the legislation is implemented will be entitled to the same one-third cash lump sum as are members of pension and retirement annuity funds, plus 90 percent of the remaining two-thirds; but a fund member who is nine years from retirement will be limited to the one-third cash lump sum plus 10 percent of the two-thirds balance.
Fund members who are younger than 50 at the date on which the legislation is implemented will be subject to the same withdrawal restrictions as are pension fund members: up to one-third as a cash lump sum, and the balance must be used to buy a pension.