The next few months are going to be very busy for retirement funds and their administrators. This is because the new tax rules regarding the annuitisation of provident funds will be coming into effect on 1 March 2021, says law firm Bowmans.
These rules were first mooted in 2013 and formed part of the process to harmonise the tax treatment of the different kinds of retirement funds, the firm said.
In the explanatory memorandum that accompanied the Taxation Laws Amendment Bill of 2013, National Treasury (NT) stated that:
“A strong link exists between insufficient retirement income for retired members of provident funds and the lump sum payouts made by provident funds at retirement.
“In short, the absence of mandatory annuitisation in provident funds means that many retirees spend their retirement assets too quickly and face the risk of outliving their retirement savings. In view of these concerns, it is government’s policy to encourage a secure post-retirement income in the form of mandatory annuitisation.”
These proposals – referred to as the T-Day reforms – were originally intended to come into effect on 1 March 2015, said Bowmans.
However, there was an outcry from some parts of South Africa that the Government was trying to nationalise retirement funds, which led to a delay in the introduction of some of the proposed changes, it said.
“The tax treatment of contributions to retirement funds has already been aligned. Since 1 March 2016, contributions to pension funds, provident funds and retirement annuity funds (RAs) are subject to the same rules regarding deductibility.
“However, due to strong opposition, the proposed annuitisation of provident funds was postponed. It appears that the annuitisation rules will now take effect, six years after their original anticipated effective date.”
The annuitisation rules
In terms of the annuitisation rules, members of retirement vehicles, irrespective of whether the vehicle in question is a pension fund, provident fund or RA, will be subject to similar rules regarding access to cash on retirement.
With specific exceptions provided in the ‘grandfathering’ provisions, from 1 March 2021, members of all retirement funds will only be able take one-third of the total value of their retirement fund interest by way of a lump sum with the balance being taken as an annuity.
This is further subject to an exception where the total retirement interest does not exceed R247,500, in which case the full amount may be taken in cash.
The grandfathering provisions exist to ensure that the restriction will only apply to amounts contributed to funds on or after 1 March 2021 and not to members who are close to retirement, Bowmans said.
This means that the rules will not apply to:
- The credit in the fund as at 1 March 2021 and subsequent fund return on that amount; or
- Members of provident funds and provident preservations funds aged 55 years and older on 1 March 2021 who will be entitled to take their full benefits on retirement (including the fund return) as well as any contributions made to the provident fund after 1 March 2021.
Impact on provident funds and their administrators
Provident funds and their administrators will need to keep accurate member records indicating the pre-March 2021 contributions and growth, and post-March 2021 contributions and growth.
This is in addition to the work that will be required as a result of several legislative changes affecting the retirement fund industry, such as the Conduct of Financial Institutions (CoFi) Bill, which are currently being considered.
The CoFi Bill was published for public comment on 29 September and contains significant proposed changes to the Pension Funds Act, 1956. One of the changes will result in the renaming of the Pension Funds Act to the ‘Retirement Funds Act’ and the addition of a definition of ‘provident fund’.
As currently drafted, the proposed definition of ‘provident fund’ reads ‘a retirement fund where a member may receive the member’s full benefit upon retirement’, which is different from the definition of ‘provident fund’ in the Income Tax Act. We assume that this definition will change to align with the Income Tax Act.
While this work is being done, it would be worth considering the relevance of the definitions of the different retirement fund vehicles in the Income Tax Act.
After all those who are subject to the grandfathering provisions have exited the system, it will be necessary to consider whether there is any point in retaining the concepts ‘pension funds’ and ‘provident funds’.
Access to funds on emigration
The Taxation Laws Amendment Bill that was tabled by the minister of finance on 28 October indicates that, notwithstanding objections to the proposed amendments to the withdrawal of funds from preservation funds and RAs upon emigration, National Treasury is going ahead with the amendments.
In terms of current legislation, members of a preservation fund or a RA may, as a general rule, not access these funds before retirement – age 55 at the earliest.
However, there are some exceptions to this rule, such as the rule that a member who emigrates from South Africa, if that emigration is recognised by the SARB for exchange control purposes (referred to as financial emigration), may withdraw his/her funds from the preservation fund or RA.
The proposal by Treasury is to only allow the withdrawal when the individual has been tax non-resident for an uninterrupted period of three years or longer, said Bowmans.
“There was substantial opposition to this proposal. One of the comments made to Treasury was that the three-year waiting period would place a financial burden on individuals as the amounts received from retirement funds are often used to cover settling in costs in a new country.
“Treasury was not swayed. In their view, the three-year waiting period is a mechanism to ensure that there is a sufficient lapse of time for all emigration processes to have been completed with certainty, without affecting such workers whose residence status changes for reasons other than emigration.”
Bowmans said that the only ‘concession’ seems to be that the current rule will still apply in respect of applications for emigration received on or before 28 February 2021.
“It is unfortunate that many potential emigrants will now feel that they have no choice other than to formalise their emigration in the next couple of months in order to obtain access to retirement funds,” said Bowmans.
“It is important for potential emigrants to understand that the proposed rules apply only to preservation funds and RAs, not to current membership of a pension fund or provident fund.
“The full after-tax value of a withdrawal benefit in respect of a pension fund or provident fund will continue to be available to current members of these funds, also after 1 March 2021.”
- Commentary by Deirdre Phillips, Aneria Bouwer, and Mogola Makola of law firm Bowmans.