Provident fund rule changes – will they affect you?

We’ve heard a lot of talk around provident funds lately after new tax rules around provident fund annuitisation were signed into law early this year.

For years, members of provident funds have taken the full lump sum when retiring from these vehicles. This has meant that many members have used their retirement assets for reasons other than providing an income and ultimately relying on the state or becoming a financial burden to their children.

So what are the changes?

From 1 March 2021, members of provident funds are required to follow the same rules as pension funds in that they will be restricted to a maximum cash lump sum of one third of the value. This does not apply if you are 55 years or older on 1 March 2021 or if the value of your retirement benefit is below R247,500.

In addition to the above, benefits that you hold on 28 February 2021, plus future growth, will not be impacted by these changes. These benefits are “vested”. This means that any benefits that you hold up to 28 February 2021 plus growth will follow the current rules.

What does this all mean?

The harmonising of provident funds will likely impact the lower income segment of South Africa and force members to look at the preservation of these funds to generate income at retirement. Generally, we find that instructions sent to retirement fund administrators are done by HR consultants who are unable to provide advice to these members and the simplest option is to withdraw the cash. Items like tax, longevity of capital, etc. are not considered.

If you’re an SA expat who holds a provident fund, it is unlikely that you will be affected by these changes unless you move the funds to a new provident/provident preservation fund as your fund value on 28 February 2021 plus growth is vested and the new rules will not apply.

Let’s use an example:

John is 45 years old. As of 28 February 2021, his total provident fund balance is R4 million. This R4 million will be his vested benefit and the old rules will apply. In addition, any growth on this capital will follow the old rules. Let’s call this “provident fund account A”. For the next 10 years, John (through his employer) contributes R1 million to his provident fund plus growth and this is valued at R1.5 million at age 55 – let’s call this “provident fund account B”.

Let’s deal with what happens to account A and B:

Provident Fund Account A:

John may take this full amount as a cash lump sum at age 55 and this will be taxed according to the retirement tax tables.

Provident Fund Account B:

The value is R1.5 million, therefore above the R247,500 de minimus rule. John may take a maximum cash lump sum of R500,000 (one third) and the balance of R1 million will need to purchase an annuity.

Conclusion

Overall, investors need to be mindful of these changes and the potential impact it will have on their planning. If you’re over 55, these rules will have no impact. If you are under 55, you will need to understand the new changes and the impact that it may have on your future plans or retirement.

If you’re considering leaving SA and are currently a member of a provident fund/provident preservation fund, it would be best to obtain some advice to plan your exit.

Speak to us about financial planning to see how we can create the right solution for your needs. Email wealth@sableinternational.com or give us a call on +27 (0) 21 657 1540 or +44 (0) 20 7759 7519.