NEW ANNUITISATION RULES FOR PROVIDENT FUNDS FROM 1 MARCH 2021 – CLARITY AND IMPACT:

5 February 2021

Dear MISA Members,

NEW ANNUITISATION RULES FOR PROVIDENT FUNDS FROM 1 MARCH 2021 – CLARITY AND IMPACT:

Having received feedback from our members, we are aware that the recent MIRF article entitled “New Annuitisation rules for Provident Funds from 1 March 2021” has created confusion amongst many.

Therefore, MISA would like to clear uncertainties you may have and further explain how the changes will impact you.

New rules regarding the compulsory annuitisation of Provident Funds will come into effect 1 March 2021. This is Government Legislation and not changes brought about by the Motor Industry Retirement Funds only, therefore it will have a similar impact on any provident fund in South Africa.

Changes for existing members

Members who are 55 years or older on 1 March 2021, will not be affected by this change provided they remain a member of the same provident fund until retirement. It therefor means that if you had not yet retired, you are entitled to 100% of the benefit as a cash lump sum. Should you however decide to migrate to another fund, all contributions after 1 March 2021 to the new fund will be effected in terms of the changes.

Example A: If a member is 55 years or older and on retirement his/her fund benefit is a R1 000 000, he/she will be able to take the full R1 000 000 as a cash lump sum, subject to tax.

Existing members younger than 55 years of age on 1 March 2021, changes will only affect benefits from his/her new contributions made from 1 March 2021 onwards. In other words, the annuitisation will only apply to fund contributions vested after 1 March 2021. These members will be able to take the full lump sum amount that was invested prior 1 March 2021.

Example B: A member younger than 55 on 1 March 2021, can take the full cash lump sum that was invested prior to 1 March 2021 at retirement. However, any provident fund contributions after 1 March 2021, will be treated as per the new tax laws.

Changes for new provident fund members

Members who start contributing to provident funds for the first time after 1 March 2021, will immediately be subjected to the new legislation. Upon retirement he/she can only take up to one-third of the fund benefit as a cash lump sum. The other two thirds of the proceeds will have to be used to purchase either a living annuity or a life annuity.

For example: A member joins the fund after 1 March 2021, and on retirement the fund benefit is R1 000 000, he/she can withdraw R333 333 as a cash lump sum, and the remaining R666 667, will have to be used to purchase an annuity.

Also note that retirement amounts with a total value below R247 500 will not be affected and the member remains entitled to withdraw the full cash amount.

Early withdrawal, under the age of 55, of your provident fund will result in the following:

• As the member opted to no longer belong to the Fund, he/she will lose out on his/her death and disability benefits provided by the Funds, as well as the investment returns earned on contributions.
• As a result of the early withdrawal, the member will incur significant tax penalties as he/she will end up having to pay tax on it at a considerably higher rate than what will be paid at retirement.

Early withdrawal from your fund is therefore NOT an avenue MISA will promote or encourage for our members, as you will forfeit your Death and Disability Benefit and pay significant tax penalties upon such withdrawal. Best to remain a member of the fund and enjoy your benefits. It is your hard earned savings.

Please bear in mind that all retirement fund withdrawals are subject to tax.