The financial services industry and the media alike have been abuzz with news about the government’s announcement of tax changes to be implemented on 1 March 2021 (also referred to as T-day).
Raschin Naidoo, Head of Legal, Technical and Consulting Support, focuses on two of the most pertinent changes, annuitisation of provident funds and access to retirement funds upon emigration.
From 1 March 2021, new contributions to any retirement fund will be subject to the same tax dispensation, and these contributions, and growth on them, will be subject to the same annuitisation requirements when members retire (that is, that no more than one-third may be taken in cash and the rest must be taken in the form of a pension).
Vested rights have been protected, so members who have contributed to provident funds before 1 March 2021 will still be able to receive their benefits in respect of those contributions in the form of lump sums at retirement. Provident fund members over 55 years of age on that date will be able to receive lump sum benefits in respect of contributions made to those funds after 1 March 2021, but only if they remain in the same fund. If these members changed funds before retirement, the member’s contributions to the new fund will be subject to the new annuitisation rule. These measures have been designed to protect vested rights to lump-sum retirement fund benefits and ensure a gradual transition to the new annuitisation requirements. The first low-income retirees from provident funds will begin to be affected by the new rules from 2025 to 2030. The full transition to the new system is expected to be completed around 2060.
A member will still be able to take the full amount in cash if the member’s value at retirement is below R247,500; this includes members over 55 who have transferred to new funds after T-day.
A frequently asked question at member education workshops is whether a member will have access to his or her full benefit if the member left their employer fund. The annuitisation rule only affects members at retirement, not resignation and therefore, the short answer to the question asked is, ‘yes, you may!’ (subject to the applicable tax tables).
Currently, individuals are able to withdraw the full capital value from their retirement annuities, as well as the remaining balance in their pension/ provident preservation fund (i.e., the balance after a previous once-off withdrawal), upon the successful completion of their formal/financial emigration. With effect 1 March 2021, individuals must be tax non-resident for an uninterrupted period for three years or longer on or after 1 March 2021 before they can access their retirement benefit lump sums (RAs and preservation funds).
The changes are largely positive, as they aim to encourage saving and protect members after their working lives. A uniform retirement system will allow all members to receive the same tax treatment of the money they contribute and how their benefits will be paid at retirement.
The annuitisation of provident funds are a culmination of the tax reform of the retirement industry, which were first announced by the Minister of Finance in his 2012 budget speech. The changes to the expatriate tax laws which started in March 2020 are largely aimed at non-compliant expatriates who have been operating under the SARS radar.