04 May Harmonising the tax treatment of retirement funds
Currently, as a member of a provident fund, on retirement you are allowed to take 100% of your retirement benefit as a lump sum (subject to paying any applicable tax on the non-tax-exempt portion of that amount).
This makes provident funds ‘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.
What is changing?
From 1 March 2021, the rules will ‘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 on 1 March 2021, 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.
Are there any exceptions to the harmonisation rules?
The new rules will not apply if your total retirement fund assets are R247,500 or less at 1 March 2021.
Similarly, if you are already 55 years of age on 1 March 2021, 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, i.e. on 28 February 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.
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 afoul of them.
You should speak to your wealth manager about possible tax ramifications if:
- you are planning to move your provident fund between service providers (e.g. in search of better performance),
- you are planning to change employer and move your provident fund investment into your new employer’s fund, or
- your current employer is proposing any future changes to the management of the provident fund in which you are currently investing.