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What your clients need to know about 1 March 2021

12 February 2021 Gareth Stokes

Changes are afoot for provident and provident preservation fund members following the assent of the Taxation Laws Amendment Act (TLAA) of 2020. Financial advisers will have to consider the impact of the changes to these retirement funding structures, effective 1 March 2021, on their clients’ overarching financial plans. Jenny Gordon, head of technical advice at Alexander Forbes, says that the legislation has levelled the playing field between pension, pension preservation, retirement annuity, provident and provident preservation funds insofar annuitisation rules.

How T-day impacts your clients

1 March 2021, which will become known as T-day, is an important inflection point in the provident and provident preservation fund space, because from that day onwards, members of these funds will have to use at least one third of their accumulated non-vested retirement capital to purchase an annuity. There are mechanisms in place to protect the accrued rights of members of these funds. Members who are under age 55 at T-day will be permitted to withdraw the total capital amount accrued before that day, plus any fund returns thereon, in cash upon retirement. And members over age 55 will have access to the total capital amount in their funds, including contributions made and returns earned after T-day. 

The TLAA inserts vested and non-vested benefits into the definition sections of each type of retirement fund. A vested benefit is the accumulated capital in a provident or provident preservation fund, at T-day, that is deemed exempt from the annuitisation rules. Gordon observes that the legislative changes present challenges for fund administrators. “The annuitisation rules will apply to the non-vested benefits of all pre-retirement funds going forward, and fund administrators will have to keep separate records of amounts in funds which are subject to the vested and non-vested benefits as at T-day,” she says. Records will have to be kept intact when the fund member transfers his or her benefits to another approved fund. 

Members age 55 and older on T-day

The vested benefit of a fund member age 55 or older will consist of all contributions made to a provident fund and transfers to a provident preservation fund of which they were a member on T-day, whether made on or after that day, plus any amount credited to the member’s accounts on or after T-day. Vested benefits will also include fund returns on the aforementioned sums. “This means that the vested benefits of members over 55 include amounts at T-day as well as amounts contributed after T-day and any amounts, including fund returns, credited to the member’s accounts after T-day,” says Gordon. Upon retirement, the full value is considered a vested benefit. 

Alexander Forbes provides an example of a 55 year old provident fund member who has an account value of R5 million at T-day and intends retiring on 1 March 2025. Winding the clocks forward, the fund member’s R5 million has grown to R6 million. The fund member has also made additional contributions between T-day and his retirement date, totalling R500 000, which grew to R1.2 million. In this example the fund member will be able to take the full R7.2 million in cash upon retirement without the requirement for annuitisation. The cash amount includes the member’s R5 million account balance at T-day; the R1 million return earned on this amount since; the R500 000 in additional contributions post-T-day; and the R700 000 return earned on these contributions. 

The exemption for those 55 or older at T-day applies to transfers to other approved funds too. Any amount transferred to another approved fund, plus the fund returns on the transferred value, are considered vested benefits; but contributions into a new approved fund, fund credits and the return thereon will be considered non-vested benefits. “This applies to voluntary transfers as well as to compulsory transfers in terms of section 14,” says Gordon. Careful consideration should therefore be given before transferring from a provident or provident preservation fund to another approved fund, especially if your client intends making further contributions to it. Lump sum disability benefits paid into a new approved fund would also be considered non-vested benefits. 

Members age under 55 on T-day

For members under 55 on T-day, vested benefits will consist of all contributions made, prior to T-day, to a provident fund or transfers to a provident preservation fund of which they were a member on T-day plus any amounts credited to the fund-up to T-day and any fund return on the above amounts. “This means that the fund value on T-day plus all future growth on that fund value going forward will be considered vested benefits, and the member will always be entitled to that portion as a lump sum upon retirement,” says Gordon. 

All contributions made to a provident fund after T-day as well as any returns on these contributions are considered non-vested benefits that will be subject to the annuitisation rules. We revisit our first example with the only change being that the fund member is 50 years old at T-day. The member will be able to take R6 million plus one third of R1.2 million in cash upon retirement. The remaining R800 000 will have to be used to purchase an annuity. The legislation provides that at least two thirds of the value on retirement, less the vested portion, must be used to purchase an annuity unless the value does not exceed R247 500. In such case the member can withdraw up to R247 500 with no annuitisation requirement. 

Seeking clarity on vested vs no-vested

There are many other aspects that financial planners and fund administrators have to consider, including that a record for vested and non-vested benefits be kept regardless of how many post-T-day fund transfers take place; that deductions under the Pension Funds Act (PFA) be made proportionately from the vested and non-vested benefits; and that the vested benefit does not extend to the fund of a non-member spouse. 

A number of clauses under the TLAA could be difficult to apply in practice. Gordon says that industry is seeking clarity from National Treasury on the treatment of lump sum cash withdrawals when a fund member takes a new job. Certainty will also be sought on the correct treatment of 2020/21 fund contributions that are paid over after 1 March 2021 as well as the treatment of risk benefits, among others. 

Writer’s thoughts:
It took some years for National Treasury to pull the trigger on the latest annuitisation reforms. At first glance, the introduction of a vested and non-vested benefit based on a fund member’s age at T-day will deliver fair results; but things are never as simple as they seem. Are you comfortable with how National Treasury has gone about equalising annuitisation rules across retirement funds? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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