How new rules will affect your retirement savings

2014-07-23 00:00

WE have received several readers’ letters raising concerns about new legislation that will see an alignment between provident and pension funds when it comes to retirement.

The Taxation Laws Amendment Act No 31 of 2013, will come into effect on March 1, 2015, and will require provident fund members 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 as is currently the case.

There is, however, no need to panic because if on March 1, 2015, you are 55 years or older, this new legislation will not apply to you, and you will still be allowed to withdraw all your funds on retirement — even if you only plan on retiring 10 years later.

In fact this new legislation will take a long time to really impact those who have accumulated funds in a provident fund as any change to retirement fund rules will only apply to future contributions and will not affect any existing retirement savings — this is called “protection of vested rights”.

For example, if you have saved up R1 million in a provident fund by March 1, 2015, you will still be able to withdraw the full R1 million at retirement, irrespective of what your final ­retirement fund is worth.

So in fact if you are worried about not having access to more funds at retirement the worst thing you could do is to cash in your existing fund and lose your vested rights.

The Taxation Laws Amendment Act also aims to align and simplify the way contributions to funds are calculated.

Currently the tax deduction on contributions to provident funds, pension funds and retirement annuities are all calculated differently.

From next year you will be able to contribute up to 27,5% of your total income into any form of retirement product tax-free.

Another area of concern and one that the unions have been making a great deal of fuss about is the issue of preservation.

There are fears that government is going to introduce compulsory preservation and that you will not be able to access your pension fund if, for example, you are retrenched or facing financial hardship.

The issue of preservation is an important one as only around three percent of people preserve their retirement funds when changing jobs and this is having a serious impact on their ability to retire comfortably.

Rather than opting for a 100% compulsory preservation, however, National Treasury is looking at measures to encourage people to preserve their company retirement funds when changing jobs by providing better information to members as well as automatic defaults that would make it easier and less expensive to preserve funds.

Government has also recognised that some people will need to access funds due to hardship and this will be considered in any legislation around preservation and retirement fund members will still be able to access a portion of their funds.

This could actually be advantageous to members of retirement annuities outside of a company retirement fund.

Currently members of retirement annuities cannot access their retirement funds until age 55.

Once the new legislation is introduced around preservation it will be standardised across all retirement products and therefore members of retirement annuities could potentially access some funds in the case of financial difficulty.

Treasury is also concerned about rumours that government is trying to nationalise pension fund assets and issued a statement that “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’]”.

It is worth noting that government is still consulting the public on preservation of retirement funds.

Amid all these changes, fears and miscommunication it is important to remember retirement funds remain the best place to save for retirement.

Apart from tax benefits on contributions, there is also no tax on any growth or interest earned in the fund. Retirement funds are also protected from creditors — it is the only asset that cannot be claimed by creditors if you run into financial difficulty.

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