Retirement reforms: what impact will they have on your provident fund?

11 Mar 2021

Focus

Digital Content Team

What the new mandatory provident fund annuitisation and the increased investment of pension funds in infrastructure projects mean for your retirement plan.

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.

Annuitisation of provident funds: unpacking T-Day

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. 

What does this mean for your 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.

Related topics

  • What is Regulation 28 of the Pension Funds Act?

    Regulation 28 of the Pension Funds Act seeks to protect members from poorly diversified investment portfolios by placing limits on investors’ maximum allocation of investment funds to more risky assets. Draft amendments to Regulation 28 will be issued by National Treasury for public comment in March 2021.

  • What are prescribed assets?

    Prescribed assets are government-backed assets that investors would be expected to buy, as a portion of their overall portfolios. The African National Congress has proposed introducing prescribed assets to fund housing, infrastructure and SED projects since 2019, however the government’s official position to date is that such investment should be voluntary and in line with investors’ fund strategy. 

  • How long does it take for a provident fund to pay out in South Africa?

    A provident fund pay-out should be processed within 21 business days, assuming your tax profile is up to date and approved by the South African Revenue Service (SARS).

  • Are provident funds compulsory in South Africa?

    Becoming a member of a provident is currently not compulsory in South Africa, however, NEDLAC constituencies have committed to accelerating auto-enrolment for all employed workers, as well as the establishment of a fund for workers currently excluded from pension coverage.

  • Are provident funds taxable in South Africa?

    Provident fund pay-outs and annuities will both be taxable. The following tax rates are applicable for 2021/2022:

     

    Taxable Income (R)

    Rate of Tax (R)

    1 – 25 000​

    ​0%

    ​25 001 – 660 000

    ​18% of taxable income above 25 000

    ​660 001 – 990 000

    ​114 300 + 27% of taxable income above 660 000

    ​990 001 +

    ​​203 400 + 36% of taxable income above 990 000

  • Provident fund vs. retirement annuity – what’s the difference?

    The legislative alignment of provident funds to other retirement funds renders them very similar in character. However, while pension funds and provident funds are arranged between employers and employees, retirement annuity funds are invested independently of employers. You cannot access any portion of these funds until retirement, regardless of any changes in employment.

Proposed amendments to Regulation 28: retirement funds as a vehicle to increase infrastructure investment

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."
Tertia Jacobs, Investec Treasury Economist

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.

Tertia Jacobs, Investec Treasury Economist

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.

Tax implications

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.

What are the new personal tax rates for 2021?

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.

Break down of personal income tax brackets

Individuals younger than 65

Taxable income Difference in Payable Tax 2021/2022 %
R200 000 -R756 -3.6%
R400 000 -R2 390 -3.1%
R500 000 -R3 510 -3.2%
R750 000 -R4 496 -2.2%
R1 000 000 -R5 140 -1.7%
R1 500 000 -R5 140 -1.0%
R2 000 000 -R8 312 -1.1%
Taxable income Difference in Payable Tax 2021/2022 %
R200 000 -R756 -3.6%
R400 000 -R2 390 -3.1%
R500 000 -R3 510 -3.2%
R750 000 -R4 496 -2.2%
R1 000 000 -R5 140 -1.7%
R1 500 000 -R5 140 -1.0%
R2 000 000 -R8 312 -1.1%

Individuals 65 – 74

Taxable income Difference in Payable Tax 2021/2022 %
R200 000 -R1 170 -9.1%
R400 000 -R2 804 -4.1%
R500 000 -R3 924 -3.8%
R750 000 -R4 910 -2.5%
R1 000 000 -R5 554 -1.9%
R1 500 000 -R5 554 -1.1%
R2 000 000 -R8 726 -1.2%
Taxable income Difference in Payable Tax 2021/2022 %
R200 000 -R1 170 -9.1%
R400 000 -R2 804 -4.1%
R500 000 -R3 924 -3.8%
R750 000 -R4 910 -2.5%
R1 000 000 -R5 554 -1.9%
R1 500 000 -R5 554 -1.1%
R2 000 000 -R8 726 -1.2%

Individuals 75+

Taxable income Difference in Payable Tax 2021/2022 %
R200 000 -R1 305 -12.9%
R400 000 -R2 939 -4.5%
R500 000 -R4 059 -4.1%
R750 000 -R 5 045 -2.6%
R1 000 000 -R5 689 -1.9%
R1 500 000 -R5 689 -1.1%
R2 000 000 -R8 861 -1.2%
Taxable income Difference in Payable Tax 2021/2022 %
R200 000 -R1 305 -12.9%
R400 000 -R2 939 -4.5%
R500 000 -R4 059 -4.1%
R750 000 -R 5 045 -2.6%
R1 000 000 -R5 689 -1.9%
R1 500 000 -R5 689 -1.1%
R2 000 000 -R8 861 -1.2%

Conclusion

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.
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