(The following changes have been delayed until 1 March 2018.)
The new SARS retirement fund regulation addresses how provident fund payouts are handled at the point of retirement. How this affects you, and your funds, depends on how old you are on 1 March 2016.
Provident Fund Payout at Retirement
If you’re 55 years or younger on 1 March 2016
The government want to encourage people – most especially the younger generation – to save adequately for their retirement and not have to rely on measly grants for financial aid in their later years. To support this, when retiring, you’re only allowed to withdraw up to one-third of the total balance of your provident fund as a lump sum payment, and the rest must be used to purchase a monthly annuity, such as a pension fund.
Wait! Don’t panic just yet. There are a few stipulations here.
Firstly, the new rules only apply to contributions made after 1 March 2016. In other words, your total balance in your Provident Fund on 29 February 2016 will be available to you to withdraw in full at retirement, if you so wish. Only the amount accumulated from 1 March 2016 to your retirement date will be subject to the new legislation.
Secondly, bear in mind that if your fund (pension, provident or RA) is worth R247,500 or less (based on contributions and earnings made after 1 March 2016) at retirement date, you’ll be able to withdraw the full balance and you’re not obliged to purchase the annuity. Previously this amount was R75,000 for pension and RA funds.
If you’re 55 years or older on 1 March 2016
You’re exempt from these new regulations and you can access your full provident fund at retirement, even those contributions made after 1 March 2016. This does, however, only apply if you remain with the same provident fund.
Cashing In Your Retirement Fund Before Retirement
If you resign from your job, for example, you can still decide to cash in (withdraw) the full balance of your retirement fund savings, but you’re going to be taxed on the full amount. Use our handy Lump Sum Tax Calculator to work out exactly how much the taxman will want.
Benefits of the Retirement Fund Tax Amendment
- Simplifies tax treatment of retirement funds by treating them all the same way for tax purposes. The different treatment under the old tax laws was very confusing!
- It provides a great opportunity for individuals to increase contributions to their retirement funds and obtain a bigger tax saving in the process.
- Employees contributing to a provident fund can now also enjoy a tax-saving each month and therefore potentially see an increase in take-home pay!
- It extends post-retirement income for Provident Fund members by making it compulsory for them to purchase an annuity at retirement (provided their fund is above R247,500).