Picture: 123RF/FLYNT
Picture: 123RF/FLYNT

As a member of a provident fund you are now allowed to take 100% of your retirement benefit as a lump sum on retirement (subject to paying any applicable taxation on the non-tax-exempt portion of that amount).

As a result, provident funds are “the odd one out”, because as a member of either a pension fund or retirement annuity fund you are allowed to take only a maximum of 33.3% of your retirement benefit as a lump sum, with the remainder required to be paid as a monthly annuity.

However, from March 1 2021 the rules will change to “harmonise” the lump-sum choices available to provident fund members, bringing them in line with those available to members of other types of retirement fund. In short, provident fund members will also only be able to take a maximum of 33.3% of their retirement fund assets as a cash lump-sum at retirement, and the remainder will have to be used to purchase a monthly annuity.

Once the harmonisation changes have come into force  provident and provident preservation funds will essentially be “equal” to pension and pension preservation funds. This will make transfers between pension and provident funds simpler as there will no longer be a tax impact to take into account.

However, there are exceptions to the harmonisation rules. The new rules will not apply if your total retirement fund assets are R247,500 or less at March 1 2021. Similarly, if you are already 55 years of age on March 1, you will still be able to take 100% of your provident fund value as a cash lump sum on retirement.

In addition, the change will not be applied retrospectively, that is, as at February 28 2021, your provident fund will value the assets you currently have in the fund and you will still be allowed to take 100% of that value plus any future growth on that value as a cash lump sum on your retirement.

Why the change? Currently, the ability to take large lump sums on retirement contributes to retirees spending their retirement savings too quickly, leaving insufficient monthly income to support them to the end of their lives.

The National Treasury wants to enhance the preservation of retirement fund assets for income during retirement by reducing the amount available as a lump sum at the date of retirement.

How will these changes work? Provident funds and their administrators will keep accurate member records indicating exactly which portion of a member’s provident fund constitutes pre-March 2021 contributions and growth and which portion constitutes post-March 2021 contributions and growth.

Administrators are currently working tirelessly to upgrade their systems and make the harmonisation process as simple and smooth as possible for their clients. They will not only need to amend their fund rules, but will also need to upgrade their operational capacities by separating and tracking vested and unvested assets.

Do you need to take action? The new rules are part of a complex piece of legislation and there could be tax consequences if you run foul of them.

You should speak to a certified financial planner about possible tax ramifications if:

  • You have any plans to move your provident fund between service providers (for example, if you are in search of better performance).

  • You are planning to change employer and move your provident fund investment into your new employer’s fund.

  • Your current employer is proposing any future changes to the management of the provident fund in which you are currently investing.

• McCallum MD at Netto Invest.

Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.