Retirement fund members will not be asked to preserve 100 percent of their retirement savings until they retire, but could be asked to preserve most of their savings.
The government plans to improve the dismal retirement savings rate in South Africa by making your retirement fund preserve your benefits when you resign from your job and leave your fund.
You will be able to access your savings, but only if you specifically request a withdrawal. This practice is known as default preservation.
This is what Olano Makhubela, the chief director for financial investments and savings at National Treasury, told the annual Pension Lawyers Association conference in Sandton this week.
The fact that most people withdraw their retirement savings when they resign from a job, rather than preserve their savings by leaving the money in the fund or transferring it to a new fund, has been identified as one of the main reasons why some 90 percent of South Africans retire with too little money on which to live comfortably in retirement.
Makhubela says default preservation can work “amazingly well”, and international research has shown that defaults generally have a high success rate in helping people to make the right decisions.
It is hard to gauge how South Africans, who are used to having access to their savings when they resign from their jobs, will react, he says, and if default preservation does not have the desired effect, the government will consider stricter measures.
Treasury proposed in the Preservation, Portability and Governance for Retirement Funds paper, released in September 2012, that retirement fund members be forced to preserve their retirement savings and be given access to only 10 percent of their savings a year. This 10 percent would be cumulative, which means that at the point at which you need access to your savings and have not already taken any withdrawals, you will have access to 10 percent of your savings for each year you have been in a fund. In other words, if you accumulated R10 000 in year one, you would be able to take R1 000 for that year; if you had accumulated R12 000 in year two, R1 200 for that year, and so on.
However, Makhubela says that Treasury would like to start with default preservation, because it doesn’t interfere with any vested rights you have as a member. If the government were to introduce compulsory preservation, this would only be after extensive consultation, and you would have a vested right to withdraw, on resignation from your job and retirement fund, all that you had saved up to the point that compulsory preservation was introduced.
He says the failure to preserve retirement savings contributes to the high costs many members face when they save for retirement. This is because lower costs come with the economies of scale achieved on larger investment amounts. If more members stayed invested in their retirement funds until retirement, the amounts invested would be higher.
But Treasury is aware that it needs to take the public gradually through its retirement reforms, he says.
Treasury’s comments follow a back-down by the government last year on amendments to tax laws aimed at introducing uniform tax deductions for all retirement funds from this month. The effective date of the amendments has been postponed to March 1, 2016.
Currently, there are different tax deductions for contributions to retirement annuities, pension funds and provident funds. The amendments aim to make these deductions the same for members of all types of funds, with most members enjoying higher deductions and thus having a greater incentive to save.
Provident fund members cannot deduct from their taxable income their contributions to their funds, but they can withdraw all their savings as a lump sum on retirement.
The amendments will allow all retirement fund members a deduction of 27.5 percent of their remuneration or their taxable income up to R350 000 a year. They will also require provident fund members to buy an annuity or monthly pension with two-thirds of the savings they contribute to their fund from the date on which the amendment comes into effect.
The unions, through the organised labour and employer organisation Nedlac, objected to the implementation of the tax amendments from this month, saying that retirement reform should not be done piecemeal but in conjunction with other reforms aimed at improving the social security system.
Last year’s Tax Laws Amendment Act was then amended to set the implementation date for the tax amendments to March 1 2016, but Treasury told Parliament’s finance committee that if there isn’t agreement on the changes by the middle of this year, the implementation date of these amendments could be delayed until 2017.
Treasury will ensure that there is a better communication strategy around the tax changes when they are implemented, to ensure that retirement fund members understand what the changes are about and that the reforms are largely for their benefit.
Finance Minister Nhlanhla Nene announced in his Budget speech earlier this month that he and the ministers of labour and of social development would release a discussion document on comprehensive social security reform.
Makhubela says there has now been some agreement between the different departments on certain issues, and the discussion document will set out an initial position that will stimulate debate about social security issues.
Treasury has also realised that it omitted certain funds – for example, local municipality funds – from the tax law amendments and it will seek to ensure that the new tax deductions also apply to these funds, Makhubela says.
Many union members are members of retirement funds and the unions members would still like to be able to withdraw a lump sum on retirement to, for example, start a business, he says.
The amendments to the tax laws provide for members to withdraw all their savings as a lump sum on retirement if they have less than R150 000 to buy a pension (annuity).
This amount is known as the de minimis amount, and Makhubela says that Treasury may propose some “tweaks” to it to meet the union members’ needs and to ensure that only members who have sufficient funds to get value out of an annuity are forced to buy an annuity.
Treasury also wants retirement funds to provide members with a default annuity product on retirement. Trustees will be expected to determine which annuity is best suited to the fund’s members and to negotiate with annuity providers.
Treasury aims to publish draft default regulations by the middle of the year.
Makhubela also told the Pension Lawyers Association conference that the tax amendments would come into effect without the means test for the social old age grant being scrapped, even though Treasury is committed to phasing it out. The means test currently ensures that only people whose income and assets (such as property or investments) are below a particular threshold qualify for the old age grant.
The scrapping of the means test was proposed in order to remove the unintended consequence of discouraging people from saving for their retirement, preserving and annuitising, since they would not qualify for the old age grant.
Makhubela says the government’s finances are quite tight, and the phasing-out of the means test has therefore been delayed. In two or three years’ time, the government may again be in a position to phase it out, he says.