By Hester van der Merwe
Retirement can be daunting. Not solely does it signify a sensible and extremely emotional transition in life, however the monetary implications are sometimes nerve-wracking. Add to this the very fact there are legislation changes looming within the first quarter of 2021 and we have now all of the components for a full-blown panic assault.
Stop proper there! Remember, information is energy. Once we’ve unpacked the changes and their implications, you’ll regain your sense of calm and management.
Pension or provident?
There are a baffling array of retirement devices on the market: provident funds, pension funds, preservation funds, retirement annuities… Let’s make this clear upfront: the one devices affected by the legislation changes are provident and provident preservation funds. If you could have a pension preservation fund or a retirement annuity – or each – then nothing will change.
Why the authorized amendments? Well, studying the above paragraph should offer you a touch. The retirement financial savings business is overly advanced and complicated for customers. This, coupled with the scary statistic that solely 6% of South Africans are in a position to retire, and you’ve got a recipe for catastrophe.
Basically, by altering the legislation, Treasury needs to standardise the legislation pertaining to all the varied monetary devices and in the end make it safer for folks in retirement.
What has modified?
Previously, in case you had a provident or a provident preservation fund, you possibly can draw 100% of the capital quantity upon retirement. From March 1, 2021, nevertheless, members of those funds must buy an annuity at retirement, which is able to offer you a month-to-month earnings going ahead. This is identical as in case you retire with a pension fund or a retirement annuity.
You are nonetheless allowed to withdraw a few of your provident financial savings in money – as much as a 3rd of the fund worth – however this isn’t obligatory.
People older than 55 are exempt
That’s the legislation change in a nutshell, however clearly actual life is a bit more difficult. You may be on the cusp of retirement, planning to make use of your current provident fund as a lump sum pay-out. Take a deep breath and calm down. The excellent news is that in case you’re an current member of a provident or provident preservation fund, all of your all advantages in these funds as of February 28, 2021, plus any future development on these advantages, is not going to be impacted by the legislation changes.
That’s not all. If you’ll be 55 or older on March 1, 2021, and also you stay a member of the identical provident fund, your future contributions may also not be impacted. The solely time the brand new legislation will apply to folks older than 55 is in case you be a part of a brand new provident fund for first time after March 1, 2021.
What about youthful folks?
When the brand new legislation comes into impact, all financial savings accrued in an current provident fund will be known as “vested benefits” – your retirement fund will hold a separate account of this money. You will nonetheless be in a position to attract any vested advantages upon retirement as a lump sum, as per the legislation pertaining to provident funds earlier than March 1, 2021. This will solely fall away in case you switch your vested advantages to a unique retirement fund earlier than you retire.
It’s fairly complicated, so right here’s an instance: Jason is 40 years outdated and a member of his employer’s provident fund. His fund worth on March 1, 2021 is R2 million. This quantity will characterize his vested profit; all contributions after the legislation change will be his unvested profit. Now, assume that at retirement, Jason’s R2 million vested profit has elevated to R3 million. His unvested profit – all of the contributions and development within the fund since March 1, 2021, totals R1.5 million.
When he retires, Jason will be in a position to withdraw your entire R3 million vested profit as a lump sum. However, he’ll solely be in a position to take R500 000 of the unvested profit as a lump sum – one third of the entire quantity – and can be required to buy an earnings with the remaining two thirds.
In abstract, there’s no have to panic. The authorities is solely attempting to offer an added layer of safety to retirement funds, which is a optimistic step. The actual concern is that so few folks in South Africa can stay up for a good retirement. Saving for the longer term is critically vital. If you’re undecided what your company presents concerning this, or in case you’re self-employed and also you need to streamline the method for max profit in retirement, seek the advice of with a Certified Financial Planner (CFP) and cross that fear off your checklist.
Hester van der Merwe, CFP, is a monetary planner at Ultima Financial Planners and the Financial Planner of the Year 2020/21.