South Africa: Annuitization of provident fund benefits
From 1 March 2021 new tax rules apply to provident funds, limiting the amount plan members can take as a lump sum at retirement.
Previously provident fund members were able to take their entire account balance as a lump sum at retirement.
New provident fund members
Individuals who start contributing to provident funds for the first time after 1 March 2021 will be required to use at least two-thirds of their account balance at retirement to purchase an annuity or set up a “living annuity”. The remaining funds can be taken as a cash lump sum. This brings the tax rules for provident funds into line with those for pension funds.
The “de minimis” account balance for annuity purchases from pension funds now also applies to provident funds. That is, where the member’s account balance in the fund is less than ZAR 247,500 at retirement, the member can take the full account balance as a cash lump sum.
Existing provident fund members
Members’ account balances in provident funds on 28 February 2021, plus future investment returns on those funds, are not affected by the changes to the tax rules. Members will continue to be able to take 100% of these benefits as cash at retirement.
Provident fund members aged 55 or over on 1 March 2021 will also be able to take their account balance from post 1 March 2021 contributions as a cash lump sum at retirement, providing they remain a member of the provident fund. However, if they join a new provident fund after 1 March 2021, the new annuity rules apply to their benefits from the new fund.
For provident fund members aged under 55 on 1 March 2021, the new rules will apply to all contributions made from 1 March 2021 onwards. This means if their account balance from post 1 March 2021 contributions is at least ZAR 247,500 at retirement, they will need to use at least two-thirds of that fund to purchase an annuity or set up a living annuity.
These changes, originally planned for 2015, complete the process of harmonising the benefits and rules of provident funds and pension funds. Benefits from contributions made to provident funds from 1 March 2021 onwards are subject to the same rules at retirement as for pension funds, except where provident fund members aged 55 or over on 1 March 2021 continue to participate in the pre-March 2021 provident funds.
Going forward, provident fund administrators will need to maintain records of members’ account balances accumulated from pre/post March 2021 contributions.
With the transitional arrangements and de minimis threshold for annuity purchases, it is likely to be several years before members feel the impact of the change. Nevertheless, employers will wish to ensure their employees are aware of the changes to avoid any misunderstandings or disappointment at retirement.
Contacts
Isabel Coles
Head of International Consulting, MBWL International
VIEW PROFILE
Email:
isabel.coles@mbwl-int.com
Tel: +44 20 3949 5710
Isabel Coles
Head of International Consulting, MBWL International
A multilingual expert in employee benefits for multinational corporates.
Isabel heads up MBWL International, advising multinational organisations on their employee benefits arrangements around the world, with a focus on corporate sales and purchases, accounting disclosures and the financing, risk management and design of benefit plans.
Her vast experience includes leading global accounting consolidations under international, UK and US accounting standards for multinational companies headquartered in the UK and overseas – with consolidations ranging in size from two to over 50 defined benefit plans.
She has advised both corporate and private equity buyers on the employee benefit considerations (including pension liabilities) associated with corporate sales and purchases in Europe and worldwide, from due diligence through to closing and subsequent integration work. Isabel has also undertaken many benefit audits and benchmarking exercises, including a 25-country audit for a company in the technology sector.
Other areas of Isabel’s expertise include reviewing and establishing international pension plans, advice on individual expatriate employee benefit packages and supporting multinationals in agreeing and implementing global governance approaches and policies for managing their employer benefit plans.
Isabel chairs the International Committee of the Association of Consulting Actuaries and is fluent in German and French.
Contacts
Isabel Coles
Head of International Consulting, MBWL International
VIEW PROFILE
Email:
isabel.coles@mbwl-int.com
Tel: +44 20 3949 5710
Isabel Coles
Head of International Consulting, MBWL International
A multilingual expert in employee benefits for multinational corporates.
Isabel heads up MBWL International, advising multinational organisations on their employee benefits arrangements around the world, with a focus on corporate sales and purchases, accounting disclosures and the financing, risk management and design of benefit plans.
Her vast experience includes leading global accounting consolidations under international, UK and US accounting standards for multinational companies headquartered in the UK and overseas – with consolidations ranging in size from two to over 50 defined benefit plans.
She has advised both corporate and private equity buyers on the employee benefit considerations (including pension liabilities) associated with corporate sales and purchases in Europe and worldwide, from due diligence through to closing and subsequent integration work. Isabel has also undertaken many benefit audits and benchmarking exercises, including a 25-country audit for a company in the technology sector.
Other areas of Isabel’s expertise include reviewing and establishing international pension plans, advice on individual expatriate employee benefit packages and supporting multinationals in agreeing and implementing global governance approaches and policies for managing their employer benefit plans.
Isabel chairs the International Committee of the Association of Consulting Actuaries and is fluent in German and French.