Retirement fund members hoping to access their money for urgent financial relief will be disappointed by the reforms proposed in a paper released by National Treasury in mid-December.
In the paper, titled Encouraging South Africans to save more for retirement, Treasury acknowledged the calls for immediate access to retirement funds for those suffering financial distress. However, the paper only addressed the various challenges in the implementation, and called for further discussion.
According to the paper, each year the SA Revenue Service (Sars) processes about 1 million tax directives for retirement and the withdrawal of lump sum benefits.
Sars would need to ensure that its directive process can reject multiple claims for individuals with several retirement funds. Treasury also raised concerns around the administrative pressure on the retirement fund administrators to process the requests, which would increase the overall costs.
Even if the withdrawal was limited to only 10% of the retirement funds, this could lead to a “run on retirement assets, which could create liquidity problems or even harm asset prices”, it said.
“With 7 million tax directives, the potential amount to be withdrawn from the retirement sector is R175 billion, out of R2 trillion in aggregate assets in privately administered funds,” reads the paper.
For defined benefit funds such as the Government Employees’ Pension Fund, excess withdrawals could create a penalty for members who have not withdrawn funds. One suggestion is that immediate access should be restricted to those with the greatest need, however, there are challenges in how this would be determined.
Those who have lost their jobs already have access to their retirement funds and the hardship could only be determined for individuals who have experienced a salary reduction. For self-employed individuals, Sars may be able to analyse provisional tax payments for proof of a reduction in income.
There is also the question of the appropriate level of withdrawal. For example, a level of 10% (to a maximum of R25 000) would be relatively insignificant for most people due to low retirement fund balances. There is already a provision allowing a paid-up retirement annuity of R15 000 or less to be taken as a lump sum before the age of 55.
With immediate access raising more questions than answers, it is unlikely that any significant announcements in this regard will be made soon, if ever. In the paper, Treasury focused on future proposals to provide a balance between emergency access while maintaining the integrity of long-term retirement savings.
This would be based on a “two-pot” approach, whereby one-third of contributions would be accessible before retirement on an annual basis, while mandatory preservation would be introduced for the remaining two-thirds. While retirement fund members could access one-third of their retirement funds at any time prior to retirement, they would not be able to fully cash in their retirement funds on resignation.
There are still many details to be ironed out, including the tax treatment of the one-third available for withdrawal. Public comment on the paper will be finalised by January 31, with proposals to be announced in next year’s budget. However, any changes would only come into effect in March 2023.
It is important to note that any changes would not apply retrospectively, with vested rights retained. Even if mandatory preservation is introduced on two-thirds of retirement value, it would only apply to contributions after the implementation date.
There is certainly no need to panic now and resign to access your retirement funds.
EXAMPLE OF THE PROPOSED TWO-POT SYSTEM
Person A is employed and has R200 000 in a provident fund at the time these amendments are implemented on March 1 202X. From that date onwards, one-third of their contributions is deposited into an accessible pot and the remaining two-thirds is deposited into the retirement pot.
. After two years, there is R20 000 in the one-third access pot, R40 000 in the two-thirds retirement pot and R220 000 in the vested right pot.
Person A faces some financial difficulties and can withdraw the R20 000 from their access pot without resigning to gain access to their retirement funds.
No further withdrawals from the access pot can be made for one year (unless they made a partial withdrawal).
. After another two years, Person A has R25 000 in the one-third access pot, R100 000 in the two-thirds retirement pot and R250 000 in the vested right pot. Person A resigns to join another company.
On resignation, the one-third access pot and the two-thirds retirement pot would need to go to a preservation fund or the fund of their new employer.
The one-third pot would still be accessible at any time. For the vested right pot, Person A would have the option to either:
- Withdraw the R250 000 vested right, although the amount would be subject to tax according to the withdrawal tax table.
- Transfer the R250 000 to a provident preservation fund. The amount would remain eligible for a once-off withdrawal up to the full value at any point before retirement.
- After another 10 years, Person A has reached retirement age. There is R75 000 in the one-third access pot and R600 000 in the two-thirds retirement pot.
Person A retires and can withdraw the R75 000 from the one-third access pot as cash and is required to purchase an annuity with the R600 000 in the two-thirds retirement pot.