On the 12th of January 2016, two new pension laws were signed by the President, namely the Tax Law Amendment Act and Tax Administration Laws Amendment Act. What is the implication of these laws?.
Most of pension funds are regulated by the Pension Fund Act of 1956, but not all of them. There are some Pension Funds that have their own respective laws governing the relevant fund – for instance Government pension funds, Eskom pension funds and all other similar government entities. There are two types of retirement funds where an employer makes a contribution to the pension fund. The two types are provident fund and the pension fund. The difference between these funds is the benefit amounts that the member will receive on retirement or resignation or withdrawal from the fund. Provident Fund members receive the whole benefit in a lump sum whereas Pension Fund members receive one third (33%) of the benefit as a lump sum and monthly payments for the remaining two thirds. For example: if you are a member of a fund with a benefit amount of R 300 000-00. In the event that you retire whilst being a member of a provident fund you will receive a lump sum of the full R 300 000-00, and where as a pension fund member, will only receive the lump sum in the amount of R 100 000-00 and the remaining R 200 00-00 will be made in the form of monthly payments.
How will this affect you?
These new laws basically remove the Provident Fund Members advantages of receiving the full lump sums and replacing it with a benefit similar to pension funds.
Pension Funds members are not affected by the new laws.
Furthermore, the contributions made by the employers to the employees’ pension funds would then be taken into consideration for income tax purposes of the employee.
However, this does not apply retrospectively. This means that all provident fund members will receive the entire lump sum accumulated up to the 28th of February 2016. For example if on the 28th of February 2016, provident fund member has R 560 000-00, he will still receive the R 560 000-00 as a lump sum.
Where provident member who has R 560 000-00 interest as at 28th of February 2016 and continues to work until he retires on the 17th of July 2020 with his interest being R 1 000 000-00 (one million), he will be able to take R 560 000-00 as a lump sum and one third of R 440 000-00 as a lump sum being R 145 200 and receive the remaining amount in monthly annuities.
The new laws affect the provident fund members adversely and as such, members of provided funds and pension funds must consult a financial adviser. We would strongly recommend the team at Attooh! for sound financial advice. We have found them to be as friendly, efficient and highly skilled an unusual combination in the financial industry these days.