A well-structured retirement plan requires a thorough understanding of the available retirement options and their associated tax implications, as the South African retirement fund industry is complex and heavily regulated.
In addition, new legislative changes to South Africa’s provident funds were implemented on 01 March 2021 to create a consistent retirement fund system over all the funding options. These legislative changes hope to achieve this by smoothing out any inconsistencies and irregularities and making it easier for members to understand the intricacies of their funds.
South Africans are known to have a poor savings culture, and the government recognises this. Hence, this is one of the main reasons that has led the government to make changes to current legislation by providing tax incentives to ensure that provident fund members preserve their capital, rather than withdraw it all on retirement. Alexander Forbes Member Watch analysis shows that approximately 50% of their members retire with less than one-fifth of their final salary to live on in retirement.
In the explanatory memorandum that accompanied the Taxation Laws Amendment Bill of 2013, National Treasury (NT) stated that “A strong link exists between insufficient retirement income for retired members of provident funds and the lump sum pay outs made by provident funds at retirement. “In short, the absence of mandatory annuitisation in provident funds means that many retirees spend their retirement assets too quickly and face the risk of outliving their retirement savings. In view of these concerns, it is the government’s policy to encourage a secure post-retirement income in the form of mandatory annuitisation.”
Up until 28 February 2021, provident fund members were allowed to withdraw 100% of their benefits, subject to taxation on the non-exempt portion. This was in contrast to members of a pension fund who were only permitted to withdraw one-third of their benefits in cash. The remaining amount was to be used to purchase an annuity (pension) income.
With the new legislation in place, provident funds will now be subject to the same rules as pension funds at the time of retirement – except for members 55 years or older, who will remain unaffected for as long as they stay on the same provident fund. For members younger than 55 and new provident fund members, the new legislation will apply to any contributions made from 01 March 2021 onwards.
The purchasing of a pension will only be required if an employee retires from their current fund. Should they resign, be dismissed or retrenched, they are under no obligation to buy into a pension fund and retain the option to withdraw their funds in cash – subject to obligatory tax. For these reasons, financial advisors need to be fully cognisant of the legislative changes to advise their clients on various retirement option changes.
What Are The Obligations Of The Provident Fund Trustees?
The Trustees are required to exercise independent discretion in respect of the fund members and beneficiaries and ensure that all reasonable steps are taken to protect the fund members’ interests at all times. In addition, they are obliged to conduct an investigation to determine how many dependants the deceased has. Only once this investigation has been completed may the Trustee/s pay out the provident benefit. The obligation on the Trustee/s to investigate and trace all dependants is vital. If the Trustee/s fail to carry out this duty, they can be deemed to have acted negligently.
How Soon Are Trustees Required To Make Payments To The Beneficiaries?
Section 37C of the Pension Funds Act provides that the fund benefits must be paid out within 12 months of the death of the fund member. However, interim payments may be made to minor dependents or nominees, with certain provisions for interest. If the fund is unable to trace any dependants, it will pay the benefit out to the nominated beneficiaries, as per the member’s request in writing, or, if no dependant or beneficiary has been nominated or can be traced, then the fund will be placed into the deceased member’s estate.
What Are The Requirements With Regards To Ensuring The Legitimacy Of The Beneficiaries?
Even though a fund member may have nominated a beneficiary or beneficiaries, it is the responsibility of the Trustee/s to allocate and apportion these funds appropriately. This entails the Trustee/s to unequivocally determine who the legal dependants are and who should receive the benefits, so that no dependant is left without financial support. In the event of the death of a fund member before retirement from the fund, the benefit allocation will be made by the Trustee/s according to strict conditions laid out in the Pension Funds Act 24 of 1956. They will apportion and pay out the benefit fairly, based on the information provided to them. According to the Pension Funds Act, a legal beneficiary is described as:
- Any person for whom the deceased is legally responsible for maintenance.
- Any person for whom the deceased is not legally responsible for maintenance but was, in the trustees’ opinion, dependent on the deceased for maintenance at the time of their death.
- The deceased’s spouse, including a party to a customary or civil union.
- The deceased’s children, including a child born after your death, an adopted child and an illegitimate child.
- Any person for whom the deceased would have been legally responsible for maintenance.
Another important change to legislation in terms of retirement benefits after 1 March 2021 and emigration, is that the criteria to determine whether or not a person can access their pension and provident fund money, will not be based on emigration but on ceasing to be a tax resident in South Africa. According to James Coutinho, a Senior Tax Advisor at Liberty Group, this would require demonstrating non-tax residency for an uninterrupted period of three years.
AED Attorneys occupies a very personalised space in the legal sphere, dealing specifically with three processes that often get lost in larger legal firms’ confusing production line, namely, Wills and Trusts, Administration of Estates, and Property Transfers.
AED Attorneys understands that every situation is unique, and although they strive to ensure that the information contained herein is accurate at the time of publishing, it cannot be guaranteed to be without errors or omissions. As a result, AED Attorneys, its employees, independent contractors, associates or third parties will under no circumstances accept liability or be held liable, for any innocent or negligent actions or omissions in this article, which may result in any harm or liability flowing from the use of or the inability to use the information provided.