Changes to retirement benefits for provident fund members, initially meant to come in five years ago, have been implemented from 1 March 2021. This will see tax uniformity for all who contribute towards retirement. These changes, in terms of the Taxation Laws Amendment Act, will also encourage greater savings, something South Africa desperately needs as it seeks to crawl its way out of an economic hole.

One of the aims of retirement reform is to create a uniform retirement fund system for all types of retirement saving vehicles, such as pension, provident and retirement annuity funds. This will allow all members to receive the same tax treatment of the money contributed and the manner in which benefits can be paid at retirement.

Previously, provident fund members could take their retirement benefit as a full cash lump sum and did not have to buy a pension (annuity) from a registered insurer when they retired. However, pension fund members were required to use at least two-thirds of their retirement benefit to buy a pension, unless the total benefit was less than R 247,500.

From 1 March 2021, retirement benefits from provident funds will be treated in the same way as pension funds for the part of the benefit based on contributions.

The changes for provident fund members are:

• Provident funds will have the same annuitisation rules as pension funds.
• This means that members will have to buy a pension (annuity) from a registered insurer with at least two-thirds of their retirement benefit, unless the total benefit is R 247,500 or less.
• Vested rights will apply. Any provident fund balance saved before 1 March 2021 plus the future growth on this until retirement won’t be affected and can be taken in cash on retirement. Retirement savings will be ring-fenced before 1 March 2021. 

Members who are 55 years or older on 1 March 2021 will not be affected by this change at all if they stay a member of the same provident fund or provident preservation fund. This means that the retirement benefit will be treated in the same way as it is currently being treated when these members retire. If these members transfer to another fund, they will still have vested rights, but contributions and growth on this to the new fund will require them to buy a pension with two-thirds of their retirement benefit.

The benefit of this change is that funds will be able to transfer members’ savings tax efficiently.

Vishane Pramrajh | Employee Benefits Manager