Eminent pension fund and financial planning experts are calling on the government urgently to amend the laws governing retirement funds to allow members access to some of their retirement savings for emergency cash relief during the Covid-19 crisis.
Although the retirement fund industry has always emphasised the importance of preserving retirement savings, the argument is that many employers and employees, whose income has dried up because of the pandemic and lockdown, need money now rather than later to tide them and their businesses over until the crisis has passed.
Personal Finance has received several requests from readers about the possibility of accessing money in their retirement funds.
The total assets in South African pension funds stood at more than R4.2 trillion in 2017, according to the most recent annual report of the Registrar of Pension Funds. Releasing 5% of that would provide relief of R210 billion to 17 million fund members nationwide.
A downside of accessing funds at this time is that most underlying investments have lost value during the crisis, and any withdrawals would lock in those losses.
In a recent Nielsen Network video podcast hosted by TV journalist Bronwyn Nielsen, five financial and legal experts co-drafted the following Twitter message: “Dear (Finance) Minister Mboweni, (SA Revenue Service) commissioner Kieswetter, acting commissioner of the (Financial Sector Conduct Authority) and all pension and provident
fund trustees. Please use your power and allow desperate people tax-free access to some of their retirement savings ASAP.”
The participants were pension fund specialist Rosemary Hunter from law firm Fasken; Professor Alex van der Heever, chair of social security systems administration and management studies at the Wits School of Governance; Xhanti Payi, director of Nascence Advisory; Magnus Heystek, director of Brenthurst Wealth Management; and Andrew Crawford, founder of Seshego Consulting.
The group suggested a special relief benefit in the form of a once-off, tax-free lump sum, which could be either a percentage of the fund credit or a fixed rand amount, such as R100 000.
Types of funds
The emergency measures would differ slightly, depending on the type of fund. There are four types of retirement funds:
1. Pension funds.
In an article “May a pension fund or provident fund lawfully pay special relief benefits to employed members in Covid-19 related financial distress?” Hunter and her Fasken colleagues Nigel Carmen, Deanne Wood and Johan Coertze argue that there is nothing in the Pension Funds Act that prevents a fund from amending its rules to provide for a special lump-sum deduction from a member’s fund credit. Such an amount could be tax-free, as it could come off the R500 000 amount you are allowed to take tax-free on retirement. Pension fund trustees would therefore simply need approval from the FSCA to change the fund’s rules (as funds may already have had to do to temporarily halt contributions).
2. Provident funds.
Hunter et al say that, again, although nothing in the Pension Funds Act prevents provident funds from amending their rules to provide for special relief benefits, there may be adverse tax consequences because of the way the term “provident fund” is defined in the Income Tax Act. Thus, in addition to a fund changing its rules, the Income Tax Act would need to be amended by Parliament.
3. Retirement annuity (RA) funds.
You are not allowed to access any savings in an RA before the age of 55, unless you emigrate. At 55, you can take a third of the accumulated savings as a lump sum, unless the fund value is R247 500 or less, in which case you can withdraw the entire amount. Again, the Pension Funds Act does not prevent an RA fund from paying special relief benefits if its rules provide for them, but the Income Tax Act would have to be amended.
4. Preservation funds
. As
things stand, you are allowed
a once-off withdrawal from a preservation fund before 55. You may therefore immediately make a withdrawal if you haven’t already done so. However, again, because of possible adverse tax consequences, the Income Tax Act would have to be amended.
In the Nielsen Network discussion, another suggestion was that members could take a loan against their retirement savings. This is already permitted in the rules of certain pension funds in the case of buying a property.
Hunter told Personal Finance she did not think a loan was appropriate at present. “We know that the levels of indebtedness in this country are already high, and it is unlikely that many of the fund members who now need early access to some of their retirement savings will soon find themselves in a position not only to resume normal contributions to their funds but also to pay back loans granted to them by their funds,” she said.
When approached for comment on the proposals, the National Treasury’s media division issued
the following statement: “Government has been considering the request of early access to retirement savings as a relief measure for members. Various stakeholders, including the regulator, are being consulted in this regard. No policy decision has been made as yet.”