Blue Chip Issue 80

RETIREMENT
Savings create resilience to deal with a crisis, whereas
debt makes households much more vulnerable.
How the new Act impacts on retirement savings
Under the new legislation, provident funds now have the
same rules as pension funds. It is important to note, though,
that members’ existing rights are not affected. This means that
the old rules will apply to the savings accumulated up to the
effective date and for older members even their continuing
savings will still be eligible for the old rules.
Those aged 55 and older on 1 March 2021 will not be affected
as the full value of their retirement savings will be paid as a lump
sum upon retirement, provided they remain in the same fund. If
they change their retirement fund after 1 March 2021, they will
be treated as a new member meaning their future contributions
will be eligible for the new rules.
Those younger than 55 on 1 March 2021 will have two
separate pots of retirement savings. The first pot includes
all retirement savings up to 1 March 2021 and all the future
investment growth on those savings. All the savings in this pot
will be subject to the old rules so will be accessible as a lump
sum when retirement age is reached.
All contributions paid into the retirement fund after 1 March
2021 will go into a separate savings pot. This pot, including the
investment growth on it, will be subject to the new rules applied
at retirement. That means that retirees can take up to one-third
of this pot as a lump sum and the rest will be paid as a monthly
pension. However, if at retirement the new savings pot is less
than R247 500, then the full 100% can be taken as a lump sum.
None of these changes impact provident fund members
who have resigned or who are dismissed or retrenched. They
can still take their full retirement savings in cash and any
amount withdrawn is taxed. Of course, it is not advisable to
take retirement savings and spend them when changing jobs
as this hampers the ability to save enough for retirement.
Similarly, those who wish to use their retirement funds to
emigrate should carefully consider their options.
Changes to phase out emigration for exchange control
purposes mean that members of retirement annuities and
preservation funds can make a full cash withdrawal, but only
if they haven’t lived in South Africa for three years and have
non-resident status with SARS for three years. This means that
they should not plan to use their retirement savings to finance
their initial setup in another country, although they will be able
to move their savings after the three-year period.
The principles of planning for retirement
Despite the clear advantages of the amendments, they do little
to impact how South Africans should plan for their retirement.
The recommended income replacement ratio of around 75% to
maintain standard of living during retirement is a ballpark figure.
It is dependent on individual circumstances such as income
level, debt levels, other savings outside of retirement vehicles
and the educational needs of any children.
While an adequate retirement savings plan is a
necessity, an overall financial wellness plan that includes
adopting more disciplined savings habits, should not be
neglected. South Africans’ low household savings rates
and high debt-to-income ratio would not have been
helped by the financial shock delivered by Covid-19.
Savings create resilience to deal with a crisis, whereas debt
makes households much more
vulnerable. The added benefit of
having cash savings available is
that they can be used to invest in
markets when they reach historical
lows – a good long-term strategy.
Not having savings outside of
retirement funds results in people
raiding retirement savings in times
of crisis, like many have done over
the past year. Although this may be
a necessity, it makes it unlikely that
savings will see investors through
their retirement. It is therefore
essential to have a plan to replenish
those savings by making additional
contributions as soon as one’s
financial situation improves.
Andrew Davison, Head of Advice,
Old Mutual Corporate Consultants
www.bluechipdigital.co.za
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