Early access to retirement funds at least a year away

Emergencies and unexpected expenses happen, or the sudden loss of income as seen during the last 18 months. It is then that people start wishing they can dip into their retirement funds. The money is there, it is yours and retirement is a long way off. ‘It’s just a small loan…’ you think to yourself.

Current legislation restricts access to retirement funds; the money is only available on retirement, if people resign or if they lose their jobs. However, increasing pressure has led to changes in legislation allowing people to access some of this forced savings – which for a lot of people is the only savings they have.

Recently, the pressure to allow people to use some of their own savings has increased to such levels that National Treasury distributed an update on the progress of changes in relevant legislation to provide for access to retirement savings.

“In response to the many media queries, National Treasury wishes to provide more details on the approach and planned time lines concerning the proposal to allow for greater preservation with limited pre-retirement withdrawals from retirement funds.

“Even before the advent of Covid-19, the government recognised that many members may need to access part of their savings in particular unexpected circumstances,” reads the announcement.

However, Treasury warns that new regulations and processes won’t be in place before next year. The explanation of the process indicates that it would be towards the end of 2022.

Previous finance minister Tito Mboweni mentioned in the 2020 Medium Term Budget Policy Statement (MTBPS) and the following national budget (2021) that access to some of the money in a retirement fund is under consideration, noting “limited withdrawals” from retirement funds under certain conditions, provided that this is accompanied by mandatory preservation upon resignation from a job.

This underlying motivation seems to speak largely towards preventing people from resigning from their jobs for the sole reason of accessing their savings.

Since the earlier announcements, government has been engaging with trade unions, retirement funds, regulators and other stakeholders to discuss how to increase savings and improve preservation of funds, while still allowing limited withdrawals.

Treasury notes that early access will require changes to current legislation and the rules and regulations governing pension and provident funds, and that is is a long and arduous process.

“Implementing any new system allowing limited withdrawals with preservation will take time, because in addition to prior consultation, legislative and fund rule amendments have to be done and fund administrators will also have to change their systems.

“Design work and consultation are ongoing; further announcements and the public release of the proposed measures for public comment and consideration will be made shortly, before or at the 2021 MTBPS (in October).

“It is envisaged that the necessary legislative amendments will be introduced in parliament thereafter,” according to Treasury.

It is expected that the earliest that any changes would become effective for a new withdrawal mechanism is 2022, according to the update.

It is noteworthy that the Government Employees Pension Fund (GEPF) is excluded at this stage, because the proposed changes concern the Pension Funds Act, which does not regulate the GEPF. The proposed changes to the Pension Fund Act would also not allow early withdrawals from retirement annuities.

That trade unions are likely to object that the vast number of government employees and investors in retirement annuities would not be accommodated might lead to delays in the new legislation.

Treasury makes special note of the fact that retirement funds are primarily designed to encourage individuals to save while working, to have money during retirement. “The government provides generous tax deductions and benefits to encourage all working people to save and preserve more for their retirement,” according to the issued statement.

It is a pertinent warning when looking at statistics that show that only a small minority of people in SA have the means to retire comfortably.

Government is suggesting a “two bucket” system. One bucket is to be preserved until retirement, while the second bucket will allow for pre-retirement access during emergencies or extraordinary circumstances. It would not surprise if the new legislation proposes a very tight lid on the first bucket, for instance, that people won’t be able to pry it off even when resigning from a job.

The pressure on accessing retirement funds since the subject was raised by Mboweni is noticeable in that Treasury asks members of retirement funds not to contact their retirement funds to withdraw funds, unless they are retiring, resigning or being retrenched.

“Retirement funds are legally not empowered to allow pre-retirement withdrawals until the law is enacted.

“It is expected that any changes to the law would only become effective next year at the earliest, and some of the medium-term  provisions may take even longer to take effect,” according to Treasury.

Most financial advisors, asset band investment managers and pension fund administrators would advise against people using retirement money prematurely.

The R1 million or R2 million in a retirement fund might look like a lot and one might think retirement is years away. It isn’t – ask the 83-year old couple complaining about the price of a salad in a restaurant.

And the problem is worse for people with only a few R100 000 in their retirement fund.