Government’s proposed retirement reforms, including those relating to preservation of savings, are aimed at ensuring that pension fund members are better protected and can retire comfortably.
We have noted public concerns that are fuelled by rumours that Government will take away people’s hard-earned pensions and prevent them from accessing their funds. These rumours are based on a misunderstanding of Government’s proposals. We would like to assure citizens that Government has no intention to nationalise people’s pension/provident funds or prevent them from accessing their money.
Instead, Government is proposing important measures to lower charges on the pension funds of workers, to ensure that they maximise their pensions. Government wants to encourage workers to keep their savings until they retire and to convert some of their retirement savings into income at retirement. Currently, only an estimated 6 per cent of South Africans are able to maintain their lifestyle and replace their income fully at retirement
These proposals have not been put into law. National Treasury is currently consulting widely on these proposals through several fora, including with labour unions, industry and engagements with the general public. It will take government at least two years before the proposals are made into law.
Low household savings a major concern
South Africa’s national savings rate is low, and savings by households are the lowest. Saving helps households to retire comfortably and reduce excessive reliance on debt. It also enables workers to afford large expected and unexpected expenses like paying for education for children, medical care, and for putting down a deposit for a house. Lack of savings can also encourage excessive indebtedness.
Retirement savings are a very popular form of saving in South Africa. However, there are some major challenges that have necessitated the Minister of Finance to propose several key reforms announced in the 2012, 2013 and 2014 Budgets. National Treasury has consulted, and will continue to consult on the reforms using various channels such as Nedlac, workshops and retirement conferences.
Encouraging preservation during employment to enable a comfortable retirement
One of the challenges of the current system is that it makes it too easy for workers to cash out their retirement savings when they leave their employer or change jobs. For example, Old Mutual states that 93.5 per cent of members who were paid withdrawal benefits in 2013 opted to take cash rather than preserve their benefits.
This means that individuals end up not having enough money for their retirement because the money is not given sufficient time to grow. Government’s proposals seek to encourage pension fund members to preserve their money in their own funds (with old or new employer), or with a financial institution when they change jobs, and to also allow some access to the funds.
Government is not proposing that people’s current and new retirement savings be kept, saved or preserved with Government (construed as “nationalisation”) or be used to fund Government projects (referred to as “prescribed assets”).
Importantly, the public is assured that, should these preservation proposals become law, the legislation would not be implemented retrospectively. This means that workers would be able to access fully all the money they would have saved up to the date when new law comes into effect or the new rules taking effect (i.e. “protection of vested rights”). The public is further assured that once the new rules come into effect pension fund members will still be able to access a portion of their savings contributed after the implementation date of the new rules.
Encouraging annuitisation to enable a better income in retirement
Currently, members of provident funds get their entire accumulated retirement money as cash at retirement and unless this cash is saved such that it provides income for the duration of a member’s life this arrangement can leave retirees vulnerable to poverty in later years. Government seeks to encourage members of provident funds to take a major portion of their retirement money as monthly pension payments instead of a once-off lump sum.
This Government proposal, which was extensively consulted on, is now a law contained in the Taxation Laws Amendment Act No. 31 of 2013. However, this alignment between provident and pension funds will take a long time to have its effect and will not negatively affect provident fund members who are currently close to retirement.
All provident fund members will, therefore, still be able to take all their retirement money they would have accumulated up to 1 March 2015 as a cash lump sum when they go into retirement.
Frequently Asked Questions on Retirement Reform
Background on retirement reforms
1. What is retirement reform?
Retirement reform is a process whereby government, through policies, seeks to:
- Encourage employees to save and provide adequately for retirement to ensure that they retire comfortably and have income that lasts for their lives in retirement.
- Encourage employers to provide retirement saving plans to their employees as part of the employment contract.
- Ensure that employees receive good value for money for their retirement savings and are treated fairly, and that their savings are prudently and diligently managed, and are kept informed of their retirement savings.
- Improve standards of retirement fund governance, including trustee knowledge and conduct, and the protection of members’ interest.
2. How far is the retirement reform process?
Retirement reform is an ongoing process and will take some time to complete. The aim is to ensure that whatever reforms are undertaken do not result in unintended consequences. In this regard, it is also imperative to learn from other countries which are going through similar policy debates and reforms. Some critical aspects of the reform took effect in 2013 (e.g. enhancing governance through the Financial Services Laws General Amendment Act, No 45 of 2013), March 2014 (the increase in the tax free lump sum on retirement, as announced in the Minister’s Budget Speech) and in March 2015, the equalisation of the tax treatment of contributions into retirement funds (i.e. pension, retirement annuities and provident funds) will become effective.
3. How will the retirement reform benefit workers?
It is envisaged that workers will be encouraged to save (more) through retirement funds, and be able to provide for their own retirement and curb old-age poverty and excessive dependency on relatives and the Government. Members of provident funds will, similar to members of pension and retirement annuity funds, now be able to claim a tax deduction on their contributions to their funds, which has the potential to increase take home salaries. The 2013 enacted governance provisions will ensure that trustees of retirement funds manage the funds diligently and properly, and that employers will now be personally liable for failure to transfer collected retirement contributions into a pension fund.
4. What are the economic implications of retirement reform?
The National Development Plan acknowledges the importance of higher savings and investments in promoting economic growth in the country. These savings can come from domestic and/or foreign sources. Foreign savings are an important source for domestic investment but are short-term in nature and can be volatile, thereby affecting the Rand. Our domestic savings have generally been very low, and therefore need to be harnessed to better promote economic growth. At an individual level, retirees will increase their chances of a financially better life in retirement.
5. Where can I find information about the retirement reform?
Information can be obtained from the National Treasury website by following this link:http://www.treasury.gov.za/publications/RetirementReform/
6. Will I have access to my pension or provident fund if I resign or lose my job before P-day?
Yes. This will only change when the preservation requirement becomes law. Vested rights (i.e. accumulated retirement savings before new laws take effect) will be protected and limited withdrawals will only be allowed on new contributions made after preservation becomes law.
Annuitising retirement savings (alignment of provident and pension funds)
7. Which reforms are related to provident funds?
Government is aligning the benefits of provident funds to those of pension and retirement annuity funds at retirement. This means that provident fund members will be required to convert at least two thirds of their retirement savings into an annuity or pension when they reach retirement, instead of a once-off large sum of cash. Further, members of provident funds will also enjoy the same tax deduction on their own contributions as currently applied to contributions by pension fund members, enabling them to potentially take home a slightly higher monthly salary. Vested rights are protected with the provident fund change (see below).
8. When will the provident fund reforms come into effect?
The reforms on provident funds are now law contained in the Taxation Laws Amendment Act No. 31 of 2013 and will come into effect on 1 March 2015. The policy and law was thoroughly consulted on with the public, which includes the unions and employer.
9. What is T-Day and has it come to effect?
T-day is the day when a new tax regime for retirement funds is to be introduced; it is now officially 1 March 2015. From this date most taxpayers will be able to deduct a higher amount in contributions from their income. T-day is also the day when the alignment of provident and pension funds comes into effect.
10. How will I be affected by the new legislation on provident funds?
The effect of the alignment between provident and pension funds will take a long time to have an impact on members, and will not affect provident fund members who are currently close to retirement. All provident fund members will still be able to take all their retirement savings that would have been accumulated as at 1 March 2015 as a cash lump sum whenever they go into retirement. The conversion of a portion of the retirement money into income at retirement will only apply to new contributions made by those who are younger than 55 when the new rules come into effect. This means that members who are 55 years and older on 1 March 2015, when the new rules come into effect, will not be affected. They will therefore still be able to even take (new) contributions made after the new rules as a cash lump sum in retirement. Further, workers who are below 55 years on 1 March 2015, will not be asked to annuitise or take a pension on the portion of new contributions if the total of those new contributions is less than the R150 000 (“de minimis rule”) threshold when they reach retirement. Irrespective of age, whatever a member has accumulated in the provident fund as at 1 March 2015, will be available to them as a cash lump sum when the person retires (i.e. protection of vested rights).
Box 1: Examples of how the annuitisation requirement for provident fund benefits will apply
Scenario 1: All provident fund members who are 55 years old and above on 1 March 2015 will not be affected by the change.
Provident fund member A is 55 years old on the date of implementation of legislative changes (1 March 2015) and has accumulated R350 000 as at 1 March 2015. At retirement on 1 March 2020, member A is 60 years old and has accumulated an additional R70 020 (i.e. “new contributions” after 1 March 2015). Member A, will therefore, upon retirement, be entitled to take the entire provident fund benefit (i.e. R420 020) as a cash lump sum.
Scenario 2: A provident fund member who is less than 55 years old on 1 March 2015, with new contributions below the de minimis threshold amount of R150 000
Provident fund member B is 50 years old on the date of implementation of legislative changes (1 March 2015) and has accumulated R280 080 as at 1 March 2015. At retirement on 1 March 2025, member B is 60 years old and has accumulated an additional R140 040. Member B, will therefore, upon retirement, be entitled to take R420 120 as a cash lump sum at retirement (made up of the first R280 080 plus R140 040 which is the benefit accumulated after 1 March 2015). Member B is not affected by the annuitisation requirement because the amount accumulated after 1 March 2015 (i.e. “new contributions”) is less than the R150 000 de minimis threshold amount.
Scenario 3: A provident fund member who is less than 55 years old on 1 March 2015, with new contributions above the de minimis threshold amount of R150 000
Provident fund member C is 45 years old on the date of implementation of legislative changes (1 March 2015) and has accumulated R237 000 as at 1 March 2015. At retirement, on 1 March 2030, member C is 60 years old and has accumulated an additional R210 060. Member C, will therefore, upon retirement, be entitled to take R307 020 as a cash lump sum at retirement (made up of the first R237 000 plus R70 020 which is one-third of (R210 060) the benefit accumulated after 1 March 2015, i.e. “new contributions”), and the remaining (two-thirds) R140 040 must be used to purchase an annuity/pension.
11. What happens if I am a member of a provident fund and want to access my money upon resigning?
We encourage members of both pension and provident funds to preserve their savings. However, provident members will be able to take all their retirement savings as a cash lump sum upon resignation (with tax implications), or to preserve it with a financial institution, or old or new employer (no tax implications).
12. Why is Government aligning provident fund benefits with those received from pension and retirement annuity funds?
To help retirees from provident funds to better manage longevity risk (i.e. the risk of outliving your retirement savings when in retirement) and investment risk (the risk of up and down movements of market prices in securities), and prevent them from spending their retirement assets too quickly and becoming excessively reliant on the State or their families for support.
13. Will I be affected by the alignment if I am contributing to a pension fund?
No. There won’t be any changes for those retiring from pension funds. The pension fund status quo will remain in terms of the annuitisation requirement (i.e. getting a pension when one retires). Whenever a member changes jobs pre-retirement, accumulated balances on P-day (when preservation comes into effect) will not be affected and can be withdrawn as per current rules.
14. Do the retirement reforms affect me if I am a member of the Government Employees Pension Fund (GEPF), or other Government related retirement funds?
The GEPF is a pension fund; changes related to provident funds will therefore not affect members of the GEPF. However, given the introduction of a higher cap for tax deductions, members of the GEPF will now also be able to contribute more for retirement purposes.
15. Is Government going to take away or deny me access to my money?
No. There is no intention by Government to nationalise workers’ pension/provident funds, or to prevent them from accessing their money. Instead, Government is proposing important measures to encourage workers to keep their savings until retirement, and to convert some of these funds into income at retirement. Workers should therefore not panic and resign to access their pension savings.
16. How do the reforms affect me if I take early retirement or get disabled or deceased ?
A person that takes early retirement, or gets disabled or deceased will be paid out their retirement benefit as according to the rules of the fund they are contributing into.
17. What are prescribed assets and how do they affect my pension fund?
Prescribed assets mean that the Government authorises the investment of retirement savings into certain developmental assets. There are no prescribed assets in the South African retirement industry landscape. Regulation 28 of the Pension Funds Act regulates the maximum exposure of retirement funds to various assets. Government is of the view that retirement funds are sufficiently invested in infrastructure, through government and state owned company bonds, such that there is no need to prescribe how much each fund ought to invest in other assets of a developmental nature.
Proposals on pre-retirement preservation
18. What is preservation?
Preservation is when money saved for retirement through pension, provident and preservation funds remains in those funds until the person retires, or is rolled over into another similar retirement savings vehicle without incurring taxes or penalties when a person changes jobs.
19. What is Government’s proposal on preservation?
Government is proposing partial preservation only of new contributions that come into the retirement system after new legislation comes into effect. Limited withdrawals will be allowed and accumulated savings on date of implementation of legislation will not be affected.
Box 2: Real -life Example of the Benefits of Preservation
|Period of saving||Paid-in contributions (R500 pm)||Expected amount after the saving period (contributions +growth)|
|0 years||R60 000||R81 632|
|20 years||R120 000||R227 823|
|30 years||R180 000||R489 628|
20. Why is Government encouraging preservation?
People tend to change jobs a number of times in their working lives. Every time an employee changes employment, they cash in their accumulated retirement savings, thereby retiring with insufficient retirement benefits. Cashing in before retirement also prematurely erodes security in old age, undermines the alleviation of chronic poverty and increases reliance on others.
21. Will preservation affect all retirement funds?
Yes. Preservation will apply to all provident and pension funds, with vested rights being protected (i.e. accumulated savings will not be subject to restricted withdrawal rules). Retirement annuity funds already have a preservation element in that policy holders cannot withdraw from the fund until they are 55 years old.
22. What is P-day?
P-day is the effective date for the implementation of preservation proposals. This date has not yet been decided on.
23. What does ‘protection of vested rights’ mean?
Protection of vested rights means that all accumulated retirement savings in retirement funds on the date of implementation of the preservation legislation will be subject to the current rules and 100% access to these savings will be allowed on resignation or withdrawal. Employees therefore, need not panic and resign in order to access the money that has been accumulated up to P-day.
24. When will preservation come into effect?
Preservation will happen at some point in future. A date for effecting preservation has not yet been announced, because there is still no policy decision on the exact and final nature on the preservation rules. Preservation is still a proposal that is open for public comment and debate. Before any form of preservation comes into effect, legislation will be passed which will still be made available for public comment before being passed into law.
Issued by: National Treasury