Protecting citizens: New laws will soon come into effect preventing provident fund members from taking out their savings as a lump sum upon retirement; instead they will receive their cash in monthly payments
The treasury’s proposed changes to retirement policies, which come into effect in March next year, have been largely welcomed by the legal fraternity.
“I think we’re in agreement that it’s not necessarily a bad thing; in fact, it’s probably a good thing,” said Leicester Adams, the managing partner of the law firm Lindsay Keller.
According to the new rules, no one will be allowed to cash in pension funds before retirement age.
“I’m sure you know of friends and family members who cash in their pension funds at age 45 or 50. The big problem with our workforce is that they don’t save — it has been proven time and time again. The only way of so-called compulsory saving is through a pension. It’s a way of ensuring people save.”
Deirdre Phillips, a senior associate at the legal firm Bowman Gilfillan, agreed. “Government wants to ensure that South Africans make adequate provision for retirement by promoting retirement savings,” she said.
“One of the critical issues is the rate at which South Africans deplete their retirement fund benefits when they change jobs,” she said. “Retirement reform is aimed at ensuring that retirement fund members are better protected and can retire comfortably by promoting preservation of retirement savings.”
According to Phillips, the government is seeking, by implementing policies and amending legislation such as the Income Tax Act, to “encourage employees to save, encourage the preservation of retirement funds, ensure that employees receive value for money, improve the governance of retirement funds and simplify the contributions to retirement funds”.
Although the proposed reforms will affect the majority of South Africans, the number of lawyers affected by the changes are comparatively few. “There are not a lot of law firms specialising in pension law and employee benefits,” Phillips said.
The treasury first outlined its proposals in September 2012. Some aspects of the reform took effect in 2013, such as the enhancement of governance as outlined by the Financial Services Laws General Amendment Act of 2013.
Others will come into effect in March next year, such as allowing pension holders to make a lump sum investment whose returns will be tax free.
Also slated for March next year (but subject to further postponements by the treasury) is “T-day”, the date on which pension funds, retirement annuities and provident funds will be treated in the same manner. Currently, provident fund members, on retirement, can take out their savings as a lump sum. Under the new proposals, this will no longer be possible. All members of provident and pension funds and those with retirement annuities will receive their cash in monthly payments.
Phillips said the date was a warning light to those advising retirement funds, employers and service providers to retirement funds to get up to speed on the changes and how these would affect their clients.