What's happening, and what isn't?
Retirement reform: What’s changing for employers?
Andrew Davison, Head of Advice at Old Mutual Corporate Consultants, explains how the retirement reforms implemented on 1 March 2021 affect employers and trustees of retirement funds.
Retirement reform: What’s changing for employees?
Nceba Pupuma, Principal Consultant at Old Mutual Corporate Consultants, explains how 2021’s retirement reforms affect employees – especially those who are members of provident funds.
Retirement reform: What’s not changing?
Thiru Govender, Principal Consultant at Old Mutual Corporate Consultants, explains how 2021’s retirement reforms affect death and disability benefits, and looks at what aspects of retirement benefits will remain unchanged.
Government is simplifying the retirement funding landscape for you, too. Here’s a video that explains how it will be easier to understand how to save for retirement, what tax breaks you could get on your retirement savings and how the changes could help you use them in the best way when you retire if you’ve been saving in a provident fund.
All your FAQs answered
Answers to the most common questions that have come up around the retirement reform changes.
- Death benefits (group life cover and funeral benefits)
- Disability income benefits provided in terms of an employer policy
- Approved lump-sum disability benefits from a Pension fund (currently, one-third maybe taken as a cash lump sum, with the balance taken as a pension).
- Those who were aged 55 and over on 1 March 2021: full member account balance at retirement (i.e. including risk benefits credited to the member account after 1 March 2021)
- Those who were under 55 on 1 March 2021: member account balance as at 1 March 2021 plus growth until retirement (i.e. not including risk benefits credited to the member account after 1 March 2021)
The changes are positive for all members, because the costs associated with managing a retirement fund are now spread over more members. These economies of scale are expected to result in lower costs and improved member outcomes.
When you purchase a pension from an insurer, it is called an annuity. The reason you would buy an annuity is to provide you with long-term, regular income after you retire in exchange for your accumulated savings or capital. You can buy different types of annuities when you retire, so you should consult a certified financial planner to make sure you buy the annuity that best suits your needs.
If you are younger than 55 on 1 March 2021, your total savings will be split into two “pots”:
1. A vested (lump sum) pot consisting of your accumulated savings at 1 March 2021, together with the investment return on those savings up to your retirement date. You will always be able to take the money in this pot as a lump sum at retirement.
2. A non-vested (two-thirds pension) pot, consisting of your contributions to savings after 1 March 2021, together with the investment return on those savings up to your retirement date. This pot is subject to the new rules, so you will have to use two-thirds (66%) of it to buy an annuity. The remaining one-third (33%) can be taken as a lump sum at retirement.
If the total savings in your “non-vested pot” (see the previous question for an explanation) is less than the de minimis of R247 500, you can take the full amount of your savings as a cash lump sum at retirement. This is called the de minimis rule.
No. If you are younger than 55 on 1 March 2021, you only have to take two-thirds of your non-vested rights pot (if the nonvested pot is greater than R247 500) as an annuity on your retirement. The rest of your savings (the other one-third of your non-vested rights pot and all of your vested rights pot) can be taken as a lump sum. Of course, you are free to still use this capital to buy a pension as that is likely to be what you need in retirement (i.e. a monthly income rather than a lump sum).
If you are younger than 55, and transfer to another fund, the two pots held for you in your fund will be transferred to your new fund. They will be treated in the same way as detailed above.
If you are 55 and older on 1 March 2021, you can still take your entire retirement benefit as a cash lump sum when you retire, regardless of your age at retirement, provided that you retire from the same provident fund that you were a member of on 1 March 2021.
If you are 55 or older on 1 March 2021 and at any stage after 1 March 2021 you transfer to a new fund, the new fund will treat you as a new member. This means your savings that are transferred plus the growth on them will be recorded as vested rights. Any contributions to the transferee fund from the date you join it will be added to your non-vested rights pot.
If you’re aged 55 or older on 1 March 2021 you should carefully consider whether it makes sense to transfer to a new fund, as it will have an impact on the amount you will be able to take as a lump sum when you retire.
Note that if the amount accumulated in the non-vested rights pot in the new fund is less than R247 500 on retirement, then you will still be able to take this amount as a lump sum at retirement.
Government has indicated that it will consider allowing members who are 55 and older on 1 March 2021 to take their full shares of fund as a lump sum if they are forced to transfer to a new fund before they retire. However, currently, no such concession has been confirmed in legislation. To the extent that your new non-vested pot exceeds R247 500, then two-thirds of that amount would be required to purchase a pension.
No, your retirement fund savings are safe. The intention of the change is to enable more South Africans to have a regular income during retirement and to harmonise treatment across all the various types of retirement funds. It is not necessary or in your interests to resign to access your retirement savings. In the current economic environment, it may be challenging to secure alternate work. Your savings remain yours for your retirement and will not be confiscated or taxed more heavily.
Trustee Boards will still be responsible for decision-making within the Fund, taking into account the needs of all parties. As a Fund member you will be able to exercise choice in relation to the type of pension and the provider of the pension when you retire.
Yes, the changes do not affect pre-retirement withdrawal benefits. If you withdraw from a fund prior to retirement, you will still be able to take your full share of fund (or any part thereof) in cash and will not be forced to preserve your fund savings for retirement.
However, taking cash is not advisable given the higher tax rates that apply to such withdrawals. Note that the tax applied to a withdrawal is exactly the same for pension and provident funds both before and after this change.
As a Pension fund member, there is no change in the way your fund benefit is paid to you on your retirement, resignation, dismissal, retrenchment or death.
Currently, however, on transfer to a provident fund, tax would apply to your benefit. With effect from 1 March 2021, transfers from pension and pension preservation funds to provident and provident preservation funds will also be tax-free.
For both pension and provident fund members, transfers to an existing retirement annuity fund will be tax-free; however, members who also have a retirement annuity fund will only be able to transfer this to another retirement annuity fund. This is because of the restriction on withdrawal prior to retirement that is applicable to retirement annuity funds.
It has been a long-held view that where an employer maintains a Pension and a Provident fund, that any merger would entail the Pension fund members transferring into the provident fund to protect the vested rights of the provident fund members.
Such a decision should however also be taken in the context of the relative size of each fund, and an analysis of provident fund members over age 55 who are likely to attain a non-vested pot in excess of R247 500. To the extent that there are only a few such members, a group engagement with the affected members may be possible, highlighting the impact of the loss of flexibility in relation to a part of their savings when they reach retirement.
In implementing a deduction from a member’s record, due to a the member defaulting on a home loan in cases where the fund was the lender or surety in respect of the home loan, a divorce decree or an employer prior lien, administrators will reduce the vested and non-vested portions of a member’s benefit proportionately. This is in line with keeping the reform principle of promoting annuitisation within retirement funds.
It is important to note that the vested status of a divorce order transfer will not carry over to the non-member spouse. In other words, where the non-member spouse elects to transfer their benefit to another fund, the full portion would be indicated as non-vested to the recipient fund.
The following risk benefits are unaffected by the legislation post 1 March 2021:
Approved lump-sum disability benefits from a provident fund are however affected.
The definition of normal retirement age includes cessation of work due to permanent incapacity due to ill health.
To recap, the vested rights of provident fund members are as follows:
Consequently, members of provident funds who were aged 55 or older on 1 March 2021 will be unaffected by the changes and will be able to take their entire retirement benefit (including the lump sum disability risk benefit component thereof) in cash. On the other hand, the lump sum disability risk benefit component of members who were younger than 55 as at 1 March 2021 will form part of their non-vested pot. If the non-vested pot of these members when they access their ill health retirement benefits is greater than the de minimis of R247 500, they will need to use two thirds of this pot to purchase a pension.
This outcome is especially relevant in the case of a young member who is paid out in terms of the disability policy and will be required to purchase an annuity that might pay a small monthly income because of the young age of the member.
For most provident fund members, as the total benefit, inclusive of retirement fund savings, is likely to exceed R247 500, more Funds may look to amend this benefit to be provided on an unapproved basis, i.e. as an employer policy rather than a fund policy. This will enable the lump sum disability benefit to continue to be payable as a cash lump sum. In this instance, it is important to consider the impact on take-home pay as members will no longer enjoy the tax deduction. The impact is likely to be quite small though.
If the lump sum disability benefit remains approved, clear communication to provident fund claimants, supported by HR and the Retirement Benefit Counselling process, will be essential in communicating this change to the form of benefit provision post 1 March 2021.
Retirement reform is likely to have far-reaching implications for the structure of the financial sector, and the economy in general. As firms strive to compete for fewer funds, competitive pressure should drive down costs, to the benefit of members. A consequence of this may be higher levels of innovation within the financial sector, and to the extent that this is not successful, possible consolidation among employee benefit firms.
Within Provident funds that have a cash option for members close to retirement as part of a life stage strategy, we may see a phasing out of this option over time. To the extent that over time assets are less cautiously invested for provident fund members close to retirement, there may be a positive macro-economic impact. Fund consolidation may also enable Trustee Boards of larger funds to access a wider investment opportunity set, enabling higher risk/return objectives to be pursued, than may otherwise have been possible.
Enhanced member education around the different types of pension options and their suitability in different circumstances, as well as the development of severely impaired life annuity products for members for younger members for whom the disability lump sum is non-vested, are steps that Trustees, consultants and product providers can take to ensure that the objectives of the regulation are realised.
The lack of pension provision in retirement remains a significant policy issue both in South Africa and globally. The reform brings South Africa closer to closing this gap, albeit over time given the transitional arrangements that apply. It is nonetheless an important step forward in achieving cohesion in the social fabric of our society.
Retirement Reforms can seem confusing, but they don’t have to be. Download this FAQ for easy reference, and to check your facts before you make any decisions about your retirement.