Pension funds and their administrators are racing against time to implement highly complex changes to their rules before South Africa’s pension fund reforms come into effect on 1 September this year, instead of 1 March 2025 as originally planned.
A major concern is the lack of final legislation which means some 3 000 retirement funds will have to amend their rules without knowing whether there will again be changes once the final bill is passed.
“There are still a lot of uncertainty and there is only about six months within which all the processes must be set in place,” says Joon Chong, tax partner at Webber Wentzel.
“We need the legislation to be tabled to parliament, voted on and passed so that it can be published and made into law. We need that really soon.”
It can be done, and hopefully it will be done smoothly, she adds.
Nicci van Vuuren, senior associate at Webber Wentzel, says pension funds still need to communicate all the changes to members, who have to understand what the changes mean for their retirement.
“The problem is you cannot educate someone if you do not know what the final legislation says,” says Van Vuuren.
“Even if there is an overall understanding … there [are] still a lot of little nuances that need to be finalised. We still do not have a date when the final legislation will be promulgated and parliament only starts on 2 February.”
Jenny Klein, principal associate at ENSafrica, says there are two competing objectives. Some people have a desperate need to access their retirement savings, in particular, because of the Covid-19 pandemic.
On the other hand, the industry wanted to have sufficient time to implement these extensive changes. It is important to get it done correctly to avoid chaos when millions of members want to withdraw, and the systems are not in place, she says.
The new system
There are three components to the new system. At implementation, the value of a member’s retirement savings will be fixed. That is the vested component. The current rules remain applicable to that portion, which means on retirement the one-third lump sum amount will be tax-free up to R550 000 and the two-thirds portion will be annuitised.
The savings component (savings pot) will have “seeding capital” that will be automatically transferred to the savings pot. This is 10% of the vested pot up to R30 000. Going forward, one-third of the contribution will be allocated to the savings pot and two-thirds to the retirement component (retirement pot).
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Contributions and the growth in the retirement pot will be preserved until retirement from the fund.
“People will no longer be able to leave their employment in order to access their retirement savings,” says Klein.
They will be able to withdraw from the savings pot once a tax year, and whatever is not withdrawn rolls over into the next year. “This is the liquid portion of your retirement funds. However, normal income tax rates will apply to withdrawals prior to retirement,” warns Chong.
Klein says the question was raised whether it is appropriate to tax the individual on the savings pot withdrawal at the marginal tax rate, which can be up to 45%. In responses to the draft bill, a flat tax rate or some form of exemption was suggested.
“National Treasury did not accept any responses to amend that aspect. I do not expect any change to the tax treatment of savings withdrawals before retirement.”
The South African Revenue Service (Sars) will have to be ready to issue millions of directives once the system is in place since pension funds will not know what the individual’s marginal rate will be if there are different streams of income.
“If someone lost their job or their income greatly decreased, then you want them to benefit from their current tax rate,” says Klein.
She gives another example where an individual withdraws R20 000 from their savings pot. It will be under the taxable threshold, but that amount forms part of their total income for a tax year, which may be taxable. They may have a shortfall on the tax that they have paid. This is also not a desirable situation.
Chong warns that an even less desirable situation is where people have outstanding tax debt.
The general rule is that if a lump-sum directive is applied for, Sars can instruct the retirement fund administrator to withhold the debt against the lump sum.
“There is no clarity on whether this will happen with the savings withdrawal, but my gut feel is that they will do it.”
She gives an example where an individual withdraws the R30 000 seed capital but has outstanding tax debt of R7 000. If the person has a tax rate of 25% the tax on the withdrawal will be R7 500. This leaves the person with R22 500 minus the R7 000 tax debt = R15 500.
Concerns were raised about the impact on retirement savings if people are able to withdraw before retirement. Actuarial studies have shown that even if an individual withdraws from the savings component every year, the results will be better overall because the two-third component is effectively locked in until retirement, says Chong.
Carmen Westermeyer, partner at Maitland & Associates, says she can understand the logic behind the reform. She believes it will offer a workable solution for people who need to access their money before retirement.
“The difficulty I see with this is that for an extended period of time there will be legacy pension funds as well as the new funds. The different tax treatments will have to be run parallel to each other,” she says.
Klein adds that retirement funds and their administrators face an enormous task. One should not underestimate this. “Retirement funds are complicated to start with, even before we did any of this.”