How new provident fund rules help you secure your post-retirement income

As part of its retirement reform initiatives and in a push to help provident fund members secure an income during retirement, Government will now be treating provident funds more like pension and retirement annuity funds.

Unlike members of pension and retirement annuity funds – who have to use two-thirds of their retirement savings to buy a retirement income – provident fund members were previously allowed to take their total retirement savings as a once-off, lump-sum cash benefit. Nashalin Portrag, Head of Momentum Corporate’s FundsAtWork says, “Unfortunately, many of these members use this lump sum up too quickly and end up outliving their retirement savings.”

From 1 March 2021 (also called T-day for purposes of the new rules), provident fund members also have to use part of their retirement savings to buy a retirement annuity.

What the new annuitisation requirement means for your retirement savings

Vested rights are protected, and exceptions will apply to certain members, savings amounts and contributions. Protection of vested rights means that all retirement savings accumulated before the date of implementation of the new annuitisation rules will still be subject to the previous rules. Portrag explains that this ensures that the two-thirds restriction only applies to contributions made to provident funds from 1 March 2021 onwards and not to members who are close to retirement.

From 1 March 2021, members of all retirement funds, including provident funds, will only be able to take one-third of their total retirement savings as a lump sum. This means that you must use the remaining two-thirds to buy a retirement income (annuity).

However, if your total retirement savings are less than R247 500, you may take the full amount as a cash lump sum.
There are different provisions for retirement savings that were accumulated up to 1 March 2021, and retirement savings accumulated after this date. The new annuitisation requirement to use two-thirds of your retirement benefits to buy an annuity will only apply to amounts contributed to the provident fund (and growth on these contributions) AFTER 1 March 2021.
If you are 55 years or older on 1 March 2021, you will be able to take your total retirement benefit with the provident or provident preservation fund on this date, PLUS any contributions you make to the fund after this date (and the growth on these contributions), as a cash lump sum. This will apply if you remain with the same provident fund until retirement.

It is well known that South Africans have a low savings culture, often spending more than we earn. “While the changes to the provident fund rules may seem like government restricting access to your savings, mandatory annuitisation is intended to encourage you to keep saving into retirement, ultimately allowing you to secure a higher income when you are no longer in full-time employment.”, concludes Portrag.

ENDS