In his 2021/2022 Budget speech, Finance Minister Tito Mboweni focused on two key changes that may affect your retirement savings plans. In this article, we will unpack what these reforms mean and will also look at how new income tax changes affect you.

The long-awaited annuitisation of provident funds was formally adopted in legislation on 1 March 2021 (T-Day, in reference to the Taxation Laws Amendment Act). The amendments are designed to help retirees plan a sufficient retirement income by curbing the lump sum pay-outs made by provident funds on retirement. 

Regardless of the type of retirement fund, and with specific exceptions, you will now only be able to receive one-third of your retirement savings as a lump-sum payment.

The balance will need to be paid out on an annuity basis - a personal retirement savings vehicle with tax benefits.

The exceptions are included in certain ‘grandfathering’ provisions whereby the new law will only apply to fund contributions on or after 1 March 2021, and not to members who are close to retirement.

The changes only affect the way your retirement benefits can be paid to you if you are younger than 55, and only when you are going to be retiring from your retirement fund. The changes do not affect the way your benefits can be paid to you if you are 55 or older on 1 March 2021 and you stay in the same fund until retirement.

The grandfathering provisions mean that the legislation only affects contributions made on or after 1 March 2021, and members will still be able to take lump-sum pay-outs of contributions made prior to T-Day. An additional exception is made where total retirement interest is less than R247,500, which may also be paid as a lump sum.

The proposed amendments to Regulation 28 of the Pension Funds Act were released on Friday 26 February for public comment. The amendments seek to make it easier for retirement funds to increase investment in infrastructure and other projects, providing a stimulus to the South African economy.

From a retirement fund investor perspective, revisiting specific clauses of Regulation 28 – in particular, a more streamlined classification of assets according to risk exposure – could help unlock new potential in your retirement fund’s portfolio. This would also allow for further diversification of your portfolio.

“The new amendments to Regulation 28 will hopefully enable investment into much-needed infrastructure projects, by providing a more precise definition for pension fund members, trustees and fund managers,” says Tertia Jacobs, Investec Treasury Economist.

"Furthermore, the proposed amendments call for the removal of the overall limit. This is a positive move, leaving the decision to invest in any asset class, including infrastructure, to the board of trustees."

However, there is also the real concern around investing in state assets and projects that have historically demonstrated a poor record of fiscal governance and management, such as Eskom and SAA.

The proposed amendments will hopefully create a balance between enabling retirement funds to invest in infrastructure projects and other government-backed assets, while maintaining your retirement fund trustees’ overall mandate to be driven by your interests.

There was good news on the tax front as Minister Mboweni provided a measure of relief to consumers and businesses burdened by an economy that has been in a protracted state of stagnation.

Against the economic fallout of the coronavirus pandemic, a debt-to-GDP ratio now hovering around 80%, and a record budget deficit of 14% of GDP, a late and unexpected increase of almost R100 billion in tax revenue allowed Treasury to defer its proposed tax increases of R40 billion over the next four years[i].

This was largely thanks to booming commodity prices driving a surprise surge in tax from the country’s miners, combined with a faster-than-expected recovery in consumer spending improving VAT income.

[i] As outlined in the Medium Term Budget Policy Statement (MTBPS) 2020, issued by the National Treasury on 28 October 2020.

Personal income tax brackets will be increased by 5 percent (this exceeds inflation), which will provide R2.2 billion in tax relief for South Africans. Most of that relief will reduce the tax burden on the lower and middle‐income households.

On the whole, Minister Mboweni hit more favourable notes for a tax base that has absorbed a heavy burden for the country’s low rate of economic growth and poor investor confidence in recent years. Together with a strong recent run in JSE-listed equities, this is better news for South African retirees and retirement fund investors. The speech further highlights the importance of saving ahead for one’s retirement and the value gained from having cash reserved should the need arise.

A note from Investec Cash Investments: We realise the disruptive effects of the pandemic are still being felt daily and as your savings partner, we endeavour to continue assisting by providing you with the best information that we can.