• Editor

Annuitisation of Provident funds with effect from 1 March 2021

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 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