The annuitisation of provident funds is the result of Government’s policy to help members secure a better income after retirement. To promote this, provident funds will be treated more like pension and retirement annuity funds. There has long been concern that provident funds not being subject to annuitisation rules has been a major cause of members of these funds ending up with insufficient income in retirement. From 1 March 2021, it will be compulsory for provident fund members to buy an annuity upon retirement with at least two-thirds of their retirement savings. Previously, they were allowed to take their total retirement savings as a once-off lump-sum cash benefit.
What The Change Means For Funds And Administrators
As a result of this change, pension, pension preservation, provident and retirement annuity funds will need to keep two sets of records to show contributions made before March 2021 (plus growth) separately from contributions and growth after March 2021.
There are still some uncertainties about all the practical implications of the legislation (for example around maintenance awards), but the basic principle of the legislation is set out below.
For purposes of the explanation, we will refer to:
- Members’ accumulated retirement savings in the provident fund (and growth on these savings) as at 1 March 2021 as their vested benefit; and
- All provident fund contributions after 1 March 2021 as non-vested benefit.
Provident Fund: Members 55 Or Older On 1 March 2021
The provident fund does not need to keep separate records for members who are 55 or older on 1 March 2021, and who stay in their provident fund until retirement, as these members will be entitled to their full benefit upon retirement.
Even if these members transfer their benefit to another approved fund, they will still be able to commute the total vested benefit as a lump-sum benefit.
Provident Fund: Members Younger Than 55 On 1 March 2021
The fund will need to keep two records:
- Record 1 to show the vested benefit.
- Record 2 to show the non-vested benefit.
These members will be able to elect their entire vested benefit in Record 1 upon retirement, even if they transfer this benefit to another approved fund.
The non-vested benefit in Record 2 will be subject to the one-third and two-thirds annuitisation provisions upon retirement, unless the benefit is less than the R247 500 de minimis amount. If it is less than the R247 000 de minimis amount, members may still take the entire amount as a lump-sum benefit.
Transfers From A Provident Fund To Approved Funds
Retirement annuity, pension, pension preservation and provident reservation funds will also need to cater for two different records:
- Record 1 will contain the vested benefit.
- Record 2 will contain the non-vested benefit.
Members will be able to elect their entire vested benefit in Record 1 upon retirement, even if they transfer this benefit to another approved fund. The non-vested benefit in Record 2 will be subject to the one-third and two-thirds annuitisation provisions upon retirement, unless the benefit is less than the R247 500 de minimis amount. If it is less than the R247 000 de minimis amount, the member may still take the entire amount as a lump-sum benefit.