Cape Town - Currently there are three types of retirement funds in South Africa, namely pension funds, provident funds and retirement annuity funds.
If a pension fund member decides to retire he or she will be entitled to take one third of his or her benefit in the pension fund as a cash lump sum and use the remaining two thirds to buy a pension. However, if a provident fund member retires he or she is entitled to take the total value of his or her benefit in the provident fund in cash.
A retirement annuity fund has the same restriction as a pension fund, thus the member of a retirement annuity fund may also only take one third of his or her benefit in cash.
Effective from March 1 2016, however, the restriction applicable to both pension fund and retirement annuity fund members will also become applicable to provident fund members. This means that a provident fund member will only be allowed to take a third of his or her retirement benefit in cash and the remaining two thirds will then have to be used to buy a pension.
According to Pieter Cronje, manager: legal consulting pensions at Absa, it is very important to note that the legislator has also brought in new terms to ensure that the existing rights of current provident fund members will be protected from March 1 2016.
Cronje provides the following explanation about the protection of existing retirement benefits:
- The total value of a provident fund member’s benefit in his or her fund as at March 1 2016, together with any investment return earned on that value after March 1 2016, can still be taken as a cash lump sum when such a member retires.
A provident fund member will, therefore, only be obliged to buy a pension with two thirds of his or her contributions (and the investment returns on those) that are made to the provident fund after March 1 2016.
The right of all provident fund members to take - as a cash lump sum - the total accumulated value of their retirement benefit in their provident funds before March 1 2016, as well as the investment returns earned on those funds, is, therefore, protected by the legislator.
- A provident fund member who has already reached the age of 55 on March 1 2016 will still be entitled to take the total value of his or her benefit in the fund (including his or her contributions to the fund after March 1 2016, as well as the investment returns on those contributions) in cash on retirement.
Protection of future retirement benefit
Cronje explains that the legislator did not only try to protect the existing fund benefits of current provident fund members, but their future benefits as well - namely new contributions made after March 1 2016 and the investment returns on those contributions.
"If a member of a pension fund or retirement annuity fund retires today and the total value of his or her benefit in that fund is R75 000 or less, such a member would be entitled to take the total benefit in cash," said Cronje.
"From March 1 2016 this amount will increase to R247 500. This means that if the total value of the benefit of any retirement fund member is less than R247 500 on retirement, such member will be entitled to take the total benefit in cash. It also means that if, after March 1 2016 the new contributions of a current provident fund member and the investment returns on those contributions are less than R247 500 on his or her retirement, such a member will be able to take his or her total benefit in cash."
New rules do not apply to benefits on resignation
Cronje cautioned that there were several media reports indicating that retirement fund members interpret the new retirement benefit rules as being applicable to their benefits on resignation, with the consequence that retirement fund members are now suddenly resigning so that they can still take the full value of their resignation benefit in their fund in cash.
"The new rules will have no effect on the resignation benefits of a retirement fund member. If a member of a pension or provident fund resigns today, such a member can take the total value of his or her resignation benefit in the fund in cash," he explained.
"If a member of a pension fund or provident fund resigns after March 1 2016, he or she can still take the total value of his or her resignation benefit in the fund in cash. It is, therefore, important that members of retirement funds first seek proper financial advice and information before making hasty decisions about their retirement funds without giving it proper thought."
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