With effect from 1 March 2021, the Taxation Laws Amendment Act of 2020 has enacted rules which regulate the annuitisation of provident fund and provident preservation fund members on retirement, as discussed below in this article by Jenny Gordon, Head of Technical Advice at Alexander Forbes.
Gordon believes there are many system changes required and a great deal of work needed to implement and give effect to these changes.
The Taxation Law Amendment Act of 2020 was signed into law by the President on 20 January 2021. This has enacted the long awaited legislation which provides for the same annuitisation rules that apply to members of pension funds, pension preservation funds and retirement annuity funds, to be applied to members of provident funds and provident preservation funds, after 1 March 2021 (T Day).
However, the legislation protects the accrued rights of provident fund and provident preservation fund (“these funds”) members as at T day. This means that:
- on retirement, members of these funds who are under age 55 on T day, will still be permitted to take amounts which accrued before T day plus fund return in cash.
- Members over age 55 on T day will have access to all amounts in the fund in cash on retirement from that fund.
- This is referred to herein as “vested benefits”.
- Amounts that are subject to the annuitisation rules will be termed “non-vested benefits” .
- The vested benefit rules have been extended to provident preservation funds of which the member had membership on 1 March 2021.
The annuitisation rules will apply to the non-vested benefits of all pre-retirement funds going forward. Fund administrators will have to keep separate records of amounts in funds which apply to the vested benefits and non-vested benefits which emanated from “these funds” as at T day. This will not only be required in “these funds”, but will apply to all funds. When members of “these funds” transfer benefits to other approved funds, records of the vested benefits will need to be kept in the new fund and administrators will need to keep separate records of vested and non-vested benefits. This will be explained herein.
Therefore, the legislative changes which defines vested and non-vested benefits appear in the definition section of each type of retirement fund and not just in the definitions of “these funds”.
Understanding the legislative framework relating to vested rights
An important distinction is made in the legislation between members of “these funds” who are under age 55 on T day (“ under 55”) and those who are age 55 and over on T day (“over 55”).
***In all cases, the determining factor will be if a member had membership of one or more of these funds on T day.***
Members of “these funds” have been entitled to retire from age 55 with a full cash lump sum. Therefore members over 55 are given greater vested benefits than members who have not yet reached age 55 on T day.
- Members age 55 and older on T day
For members over 55 on T day, their vested benefits will be:
- All contributions to a provident fund and transfers to a provident preservation fund of which they were a member on T day, both on and after T day.
- Any amount credited to the member’s account on and after T day
- Any fund return on the above
This means that the vested benefits of members over 55 include amounts at T day as well as amounts contributed after T day and any amounts, including fund return, credited to the Page 2
members account after T day. The full value at date of retirement will be vested benefits. This applies in the provident fund they were members of on T day
Example: On T day value of member’s account is R 5 million. On date of retirement the value has grown to R 6 million. Between T day and date of retirement, the member contributed contributions of R500 000 and with growth is R1million. Member retires on 1 March 2025
The member may take R7 million in cash on retirement. No annuitisation is required.
Transfers to other approved funds (over 55)
On transfer to another approved fund, all amounts at date of transfer plus fund return on the transfer value in the new fund going forward will be vested benefits.
However, new contributions and fund credits plus fund return thereon in the new fund, will be non-vested benefits.
This applies to voluntary transfers as well as to compulsory transfers in terms of section 14. A section 14 transfer can occur when a section 197 transfer takes place as well as when a stand alone fund seeks to consolidate in an umbrella fund. Contributions which would have been vested benefits in the transferring fund, no longer qualify in the new fund.
Example: On T day, the value of the member’s account in a provident fund is R 5 million. Contributions after T day are R100 000 .On date of transfer to a pension fund, with fund return, the vested benefit is R 6200 000. On transfer to the Pension fund, R6 200 000 plus all future fund return on that amount will be vested benefits. If the member makes contributions to the new fund, those contributions plus fund return will be non-vested benefits.
Lump sum disability benefits (over 55)
If the member is in a provident fund on T day, all amounts which are contributed or accrue to the fund after T day are vested benefits. Therefore a lump sum disability benefit will be part of the vested benefits in the provident fund of which the member had membership on T day.
If the member were to transfer to a new approved fund after T- day, a disability benefit which pays out in the new fund, will be non-vested benefits.
- Members under age 55 on T-day
For members under 55 on T day, their vested benefits will be:
- all contributions made, prior to T day, to a provident fund; or transfers to a provident preservation fund, of which they were a member on T day;
- with the addition of any amounts credited to the fund-up to T-day
- and any fund return on the above amounts
This means that the fund value on T day plus all future growth on that fund value going forward will be vested benefits and the member will always be entitled to that portion as a lump sum.
All contributions made to a provident fund of membership after T day plus any fund return or credits after T-day, will be non-vested, and on retirement will be subject to the annuitisation rules.
Example: On T day, the value of the member’s account is R 5 million. On date of retirement the value has grown to R6 million. Member retires on 1 March 2025. Between T day and date of retirement the member contributed contributions of R500 000 and with growth is R1.2 million.
On retirement the member may take R6 million +1/3 of R1.2million as a lump sum, R800 000 must purchase an annuity.
De minimis amount of R247 000
The legislation provides that at least 2/3 of the value on retirement (less the vested portion) must purchase an annuity unless the value does not exceed R247 500.
Example: On T day value of member’s account is R 5 million. On date of retirement the value has grown to R6 million. Member retires on 1 March 2025. Between T day and date of retirement the member contributed R 150 000 and growth was R90 000 = R240 000, then the full fund value including the vested portion may be taken in cash on retirement and no amount would have to purchase an annuity. R 6 million + R240 000 = R 6240 000 can be taken in cash.
Transfers to another approved fund
Vested benefits and non- vested benefits that are transferred by a provident fund member or provident preservation fund member to any other retirement fund after T-Day (excluding the GEPF) must retain their vested and non-vested nature in that new retirement fund. This general rule is also true for any of those vested benefits and non-vested benefits that may be transferred to successive retirement funds. Vested and non-vested benefits will retain their nature irrespective of how many times they are subsequently transferred to other transferee retirement funds and irrespective of the type of retirement fund they are transferred to.
Example: On T day, the value of the member’s account in a provident fund is R 5 million.(vested benefit) Contributions after T day are R100 000 (non-vested) On date of transfer to a pension fund, with fund return, the vested benefit is R6 million. The non-vested benefits of post T day contributions plus fund return is R200 000.On transfer to the Pension fund, R6 million plus all future fund return on that amount will be vested benefits. The R200 000 and all future fund return on that will be non-vested benefits. All future contributions plus fund return thereon in the pension fund will be non-vested benefits
Deductions under the Pension Funds Act
The legislation provides for amounts which are permitted to be deducted in terms of the Pension Funds Act to be deducted proportionately from the vested benefit and the non-vested benefit. Examples of these deductions are housing loans, divorce orders and damages claim to employers.
For example, a divorce award to a non-member spouse will reduce the member’s vested and non-vested benefit proportionately where there is both a vested benefit and a non-vested benefit in the fund.
Transfer of divorce award to non-member spouse approved fund
Although a divorce award will reduce a member’s fund proportionately, the vested benefit is not extended to a fund of a non-member spouse. If a non-member spouse elects transfer of a divorce award to an approved fund, it will all be a fully non-vested benefit.
On leaving employment a member may elect to take a lump sum in cash and transfer the balance to a new employer fund; to a preservation fund; or to a retirement annuity fund. There has been some debate as to whether this type of partial withdrawal is permitted to be deducted proportionately from the vested benefit and non-vested benefit. Every fund is a pension fund approved under the Pension Funds Act and therefore the legislation is capable Page 4
of being interpreted to extend to pre- retirement part withdrawals. The regulators are examining this point. Unless we receive an indication that this is contrary to National Treasury policy, we shall be interpreting a pre- retirement part withdrawal to be withdrawn proportionately from the vested benefit and non-vested benefit.
February 2021 contributions to funds which are paid later than 1 March 2021
Due to the way in which the legislation is worded, it has been a point of uncertainty, whether contributions of members which are due in February 2021 or earlier and which are paid to the provident fund by employers later than 1 March 2021, will be included in the vested benefits of members under 55. At National Treasury hearings on the Taxation Laws Amendment bill, SARS was of the view that they qualified as contributions prior to 1 March 2021. We will monitor whether there are any communications from the regulators to the contrary.
Lump sum disability benefits under 55
Only amounts which have accrued before T day fall into vested benefits. Therefore if a member is disabled after T day, the lump sum disability benefit payable to the fund will not fall into the vested benefits. The payment will fall into non-vested benefits.
The legislation states that any amount contributed to a provident fund or provident preservation fund forms part of vested benefits. However, amounts contributed to funds include risk benefits as well as charges. We are of the view that the intention of the legislation is that only the contribution allocated to retirement funding should be vested benefits and we are interpreting and applying it accordingly.
Transfers within the same fund.
Where a member has membership of an umbrella provident fund on T day, whether over or under 55, and later leaves an employer and becomes employed by an employer who participates in the same umbrella fund, that member’s vested and non-vested benefits will not change at all. The member has changed employers but is still a member of the same retirement fund.
Tax free transfer between funds
Since members of provident funds will be required to annuitise retirement benefits going forward, subject to the vested benefits, there is no need to disincentivise pension to provident fund transfers or pension preservation fund to provident fund or provident preservation fund transfers. With effect from 1 March 2021, transfers from pension and pension preservation funds to provident and provident preservation funds may be effected without paying tax.