Tax amendments: understanding the changes to the provident fund and the provident preservation fund and its impact on members.

Mohamed Raees Hussain | Attorney: Conveyancing Division
The treatment of provident funds and provident preservation funds has been significantly changed by the recent amendments which have become effective 1st March 2021. The amendments will see provident funds being treated in the same way as a pension fund.

 

Pension Fund vs Provident Fund:

The major difference between a pension fund and a provident fund is that with a provident fund, one is able to withdraw the entire benefit (savings amount) upon retirement, whereas with a pension fund, only one third of the savings amount can be withdrawn upon retirement and the balance (two thirds) must be used to purchase an income providing product or annuity.

Current position in light of the legislative changes:

As at 1st March 2021, the treatment of the provident fund has been changed with Government seeking to ensure greater preservation of retirement savings which would ideally place less strain on Government arising from mal-administration of one’s retirement savings thereby relying on Government for old-age grants.

This significant change will result in provident funds being treated in the same manner as pension funds, i.e. only one third of the savings amount can be withdrawn on one’s retirement with the remaining two thirds being used to purchase an income product or annuity which will pay out an amount monthly, subject to certain exceptions as explained below.

Impact of the changes:

The changes were effective 1st March 2021 and the impact thereof is as follows:

  1. 1. Existing members of a provident fund (under 55 years):
  • Any savings amount in a provident fund as at 28th February 2021 will still be capable of being withdrawn completely.
  • The savings amount amassed from 1st March 2021 until retirement will be subject to a maximum withdrawal of one third with two thirds to be used to purchase an income product or annuity. 
  1. 2. Existing members of a provident fund (55 years and older):
  • The new laws will not impact members of a provident fund who were 55 years or older as at 1st March 2021. As such, these members will be able to withdraw their entire savings amount on retirement.
  1. 3. New members to a provident fund:
  • All new members who join a provident fund from 1st March 2021 onwards will be subject to the new laws, i.e. a maximum withdrawal of one third with two thirds to be used to purchase an income product or annuity.
  1. 4. Other instances where a member of a provident fund may withdraw their entire savings amount is where the savings amount is less than R247,500.00 on retirement. This amount is subject to change.

Frequently asked questions:

Question:When are the changes effective?

Answer:The changes were effective from 1st March 2021.


Question:Who do the changes apply to?

Answer: If you, as a member of a provident fund were under 55 years of age on 1st March 2021, then the changes will apply to you.


Question:With the changes being effective as at 1st March 2021, is there anything that I need to do?

Answer:No, all necessary changes will be processed by your fund administrators.


Question:Are there any exceptions to the changes?

Answer:Yes, the exceptions are:

  1. The changes do not apply to those members 55 years and older as at 1st March 2021.
  2. All savings accrued until 28th February 2021 can be withdrawn on retirement.
  3. If your total savings amount accrued from 1st March 2021 until retirement is less than R247,500.00, then this can be withdrawn in its entirety.

Based on the above, it is prudent to familiarize yourself with the changes and how it impacts you as a member of a provident fund. For further details and guidance on the changes, consult your fund manager.