Provident Funds: Compulsory preservation is finally implemented.

The 2015 income tax act amendments were finally promulgated on 8 January 2015. And the biggest stuff that hits the news is the compulsory preservation of provident fund benefits.

COSATU were strongly opposed to the concept and have been overruled by National Treasury.

Since way back when provident fund members will have been allowed to cash in the total benefit on retirement. This is different to pension funds and retirement annuity funds where only one-third of the total benefit can be cashed in on retirement. Now the playing field will be leveled with effect from 1 March 2015.

Those over 55 years old on 28 February can relax. The amendment will not affect them at all. Even contributions made between now and retirement will not be subject to the new preservation rules.  Thus for those over 55 there is absolutely no need to change retirement plans.

The provident fund values of those under 55 are in the spotlight. However accumulated provident fund benefits as at 28 February 2016, together with accumulated future growth thereon, will escape preservation regulations. Only future contributions and growth will be subject to preservation.

And then comes the general exemption that allows any retirement fund benefit to be withdrawn in full on death of the member or if two-thirds of the value of the fund is less than R165 000.

It will take a couple of articles over the next few days to fully cover this stuff. But lets make a start.

British Prime Minister, David Cameron, would agree with COSATU and say ‘Bullsh$t, pensioners are responsible and they must be given freedom of choice to cash in their entire pension benefits.’ The UK has gone in the opposite direction.

In most things in life I am pro-choice. But when it comes to retirement funds I am a preservation man myself. And that comes from years of watching South Africa’s provident fund retirees make the most awful mistakes and squander their retirement benefits.

Firstly, the taxation on lumpsum benefits can be prohibitive. Okay, I would advise all retirees to take the first R500 000 tax-free lump sum. Even the 18% imposed on benefits from R500 000 to R700 000 is attractive. But thereafter the rates escalate to up to 36%. Pensioners could do far better by taking an annuity and being taxed at annual marginal rate while the capital grows tax-free in the retirement fund and exempt from estate duty.

Second, South Africans have little regard for their life expectancy. Those who make it to 60 are expected to live to 76 or even more. That lumpsum has to last 12 to 25 years!

Third, South Africans are, in the main, lousy investor, and stuff up the subsequent investment of their lumpsums.

Fourth is the biggest problem. There is a golden rule in retirement. Never tell anyone you have money, you will loose the lot. I have seen more South African pensioners left destitute through the demands and expectations of family and friends than anything else. Pensioners just can’t say ‘NO! V$koff! I’m not going to invest my pension capital in your coffee shop in George!’

I think that a one-third limit on the retirement fund lumpsum is, in most cases, reasonable and in the best interest of pensioners.


No Comments »

No comments yet.

RSS feed for comments on this post. TrackBack URL

Leave a comment