Provident fund preservation: Don’t kick a fresh turd on a hot day

‘You can’t polish a turd’ or so the saying goes. And they have even gone as far as proving that on the TV series ‘Mythbusters’.

The turd in this case is the business of preservation of provident fund benefits introduced by he latest income tax amendments, effective from 1 March 2016. Lets put it down as the last stand of past finance minister Nene. And the unions are not letting the issue go, threatening strike action and more.

There can be little doubt that provident fund preservation will be revisited during 2016. It should be. Fortunately time is on our side as only the wealthiest taxpayers could ever be affected in the short-term.

Compulsory preservation of provident fund benefits only comes into play where the value of contributions and growth after 1 March 2016 exceeds R247 500. Few will achieve that in the short term.

All benefits accumulated before 1 March 2016 plus any growth thereon will be exempt from preservation. And provident fund members over 55 on 1 March 2016 will never be affected by preservation.

Unions are pro choice. They argue that it’s the members’ choice. And given our very liberal constitution freedom of choice is a very valid point. If a provident fund benefit is cashed in and used to pay off debt, establish a micro business or even squandered, the member has the right to do so.

The counter argument is that if the provident fund benefit is spent the member becomes a dependent on the State and others.

Then add that a benefit of R247 500, after payment of a one-third lump sum will leave R162 500 to purchase an annuity. That will buy an annuity of about R1 000 per month. And that hardly amounts to the dot in the i in the word sh%t.

The problem I foresee is that compulsory preservation can easily be avoided through resignation rather than retirement. The only difference is that a resignation benefit is taxed from R 25000 upwards and a retirement benefit only from R500 000 upwards. So you can have the money if you want to pay the tax (in most cases 18%.)

If provident fund preservation the answer then the preservation threshold should be substantially increased. If all retirement fund lumpsums can be tax-free up to R500 000 then surely  the preservation threshold should be the same. If this threshold is increased with inflation (as it never has been) most lower income taxpayers would be exempt from both taxation and preservation.

I wonder if finance minister, Pravin Gordhan will revisit provident fund preservation in the National Budget Speech on 24 February 2016. Or will he follow those famous words of Harry Truman ‘Don’t kick a fresh turd on a hot day’?

Provident fund preservation is only one issue in the disaster that is financial planning in SA today. Over the past 30 years employers have successfully side-stepped the responsibility of providing pensions by bullsh$tting employees away from defined benefit pension funds towards defined contribution provident funds. And nobody stopped to properly educate the employees on all the implications.

There is much work to be done!

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