Proposed extension of provident fund deadline must be used to educate members on positive impact – GTC

The National Treasury’s call on Parliament to extend the deadline on the proposed annuitisation of provident fund benefits by another year to 2019 is not ideal, but should this time be used to ensure proper communication with stakeholders, it may have a substantial and positive impact for millions of South Africans.

This is the opinion of Celeste Kruger, Consultant: Employee Benefits at leading wealth and financial advisory firm GTC.

National Treasury first introduced the regulation aimed at harmonising the tax treatment of provident and pension funds in 2015.

“This is an attempt by the government to assist employees to retire more comfortably and handle their retirement savings responsibly, requiring them to invest two thirds of their retirement savings into retirement income products, such as an annuity, all the while retaining their option to withdraw a third as a cash lump sum.” explains Kruger.

The regulation implementation date was set for last year, but was postponed until 2018 following continued opposition by trade unions. This new proposal extends this date once again.

“The retirement fund industry requires certainty on the matter due to imposed changes which this will bring within the rules and administration systems. It is further hoped that the extra time will be constructively used to explain to millions of misinformed Provident Fund members who are under the wrong impression that the government wants to control their savings,” says Kruger.

“South Africa has one of the lowest household savings rates in the emerging world and it has been one of National Treasury’s priorities to improve this, by educating the workforce on the importance of saving towards their own retirement. The failure of the employed public to do this, further places immeasurable strain on the government’s already tight coffers when employees who were meant to have provided for themselves are added to the government’s pension bill when they reach retirement.”

She believes a lot of the opposition to the change can be ascribed to vague communication with the workforce.

“It is crucial to stress to members that the reform will not take benefits away – it simply ensures that the money is used for the purpose it was intended , namely to take care of members in their old age. It also does not remove any benefits from members before they retire,” says Kruger.

She points out that the majority of provident fund members will not actually be affected by this regulation, in the near future.

“National Treasury’s data indicates that nearly 84% of provident fund members earn R160,000 or less per year, and these retire on a benefit of R300,000 or less. Should a member’s entire retirement benefit amount to less than R247,500, then the whole amount may be taken as a cash lump sum (de minimus) and not be subject to the one third cash and two thirds annuity purchase limitations. This means that the majority of low-income earners will not be affected by the regulation for at least the next five years,” she says.

“Further: current provident fund members will still be entitled to their vested rights – their contributions and its growth – as a lump sum until 1 March 2019.”

She concludes: “Not many people are knowledgeable or disciplined enough to manage large amounts of money, but when this legislation is enacted and it becomes compulsory for provident fund members to invest the majority of their retirement benefits appropriately, it will ensure the use of their hard-earned capital at a more reasonable rate and thereafter provide for a more sustainable retirement.”