Article on Changes to Provident Funds
/Written by Roulon du Toit
The South African government intended to reform the laws pertaining to provident funds from March 2015. However, this led to significant objections and protest action from trade unions and the changes were delayed until March 2021.
When a person reaches retirement age they often become entitled to a retirement
Lump sum payment and/or
Annuities
A person who has reached retirement age needs to elect to receive part of their retirement fund benefit in the form of a lump sum with the balance paid in the form of an annuity. For members of pension funds and retirement annuity funds this lump sum payment is limited to a maximum of one-third of the fund’s value.
Members of provident funds did not have the same restriction and could elect to have the full fund benefit commuted into a lump sum payment. However, the government amended the law in an attempt to help its citizens safeguard their retirement nest eggs into the future.
From 1 March 2021, the laws pertaining to provident funds have been brought more in line with the treatment of other retirement funds. In future, members of provident funds will also be restricted to commute no more than one-third of their provident fund benefit in the form of a lump sum with the balance being paid out in the form of an annuity.
However, the following should be noted:
Provident fund members who are 55 years or older on 1 March 2021 will not be restricted in this manner in respect of any provident funds which they are members of at this date.
For all other members, the contributions to provident funds before 1 March 2021, together with the growth thereon, will not be subject to the changed laws. This means that only contributions on or after 1 March 2021 will be limited by the two-thirds annuitisation rule.
Further, regardless of the type of fund, if the value of the fund benefit does not exceed R247 500, the member can still elect to have the full fund benefit commuted for a single lump sum payment.
