Here, there, and everywhere: changes to SA retirement funds in March 2021
The 1st of March 2021 has rung in the changes for Provident funds. The purpose is to harmonise the rules governing these funds, and how they may be accessed. Put succinctly, from the 1st March the rules which currently apply to pension funds and retirement annuities upon retirement, will apply to provident funds as well.
What this means for Provident fund customers
There will be no changes to:
- Pension funds or Retirement Annuities.
- Personal investments such as unit trusts, endowment and whole life policies.
- Provident fund benefits for members who are age 55 or older as at the 1st March 2021.
- accrued provident fund credits as at 1st March 2021 and future interest on these credits will still be able to be taken as a lump sum at retirement, and
- pension and provident fund members will retain the right to elect a cash lump sum benefit upon resignation, dismissal or retrenchment.
The group that will be affected are members of provident funds who are younger than age 55 as at the 1st March 2021.
- The impact of the change is that future accumulations (post 1st March 2021), will at retirement be treated in the same way as pension fund benefits, which allows for up to 1/3rd of the benefit to be taken as a cash lump sum with the balance being used to purchase a pension.
- Currently if a retiring members total accumulated credit is less than R247,500 the full amount can be taken in cash – a condition that has been retained.
If your retirement fund makes provision for a lump sum disability benefit, then the benefit when payable will be treated the same as a retiring member from a pension fund, i.e:
- If the benefit is less than R247,500 the full benefit can be taken as a cash lump sum, or
- If the benefit is more than R247,500 a maximum of up to 1/3rd of the benefit can be taken in cash, and the balance used to purchase a pension.
On March 1st 2021 the Tax Laws Amendment Bill (TLAB) drafted by National Treasury and the South African Revenue Services (SARS) came into effect. This has particularly affected those wanting to emigrate and the exchange control process.
Previously, South Africans who financially emigrated, and had concluded the exchange control process of financial emigration as recognised by the South African Reserve Bank, were able to withdraw their retirement funds in full. One of the benefits for a South African to emigrate for exchange control purposes (often referred to as ‘financial emigration or exchange control emigration’), was that they had access to their retirement funds.
- However, TLAB does away with the exchange control emigration as a mechanism to access one’s retirement funds. Instead, the new requirements to access one’s funds are:
1) an individual must have ceased to be a South African tax resident
2) an individual must have been tax non-resident for at least three consecutive years.
- For many South Africans already living abroad, this will be a welcome relief, as they would possibly already be tax non-resident – and, as a result of the amendment, would be able to access their retirement funds as soon as they have been tax non-resident in South Africa for three consecutive years after 1st March 2021.
- For any South Africans planning to leave South Africa within the next year, this might be unwelcome news as, from 1 March 2021 they need to wait three years to access any pension, preservation fund or retirement annuity.
- Reasons for the current change refer to the increase in the number of South Africans looking to formalise non-resident status in order to withdraw their retirement funds from South Africa and invest in a more stable economy. However, with the new changes, the government has put steps in place to better contain and control the outflow of these retirement funds. This is why South Africans who no longer pay tax in South Africa are prevented from withdrawing retirement funds until they can prove non-tax residency for an uninterrupted period of three years.
- Even if an individual is a tax non-resident in South Africa, any retirement lump sum withdrawal would be subject to tax in South Africa. It’s also important to remember that a higher tax rate applies to withdrawals made before retirement age.
- In addition, foreign-earned income above R1.25 million will now be taxable.
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