Days numbered until provident fund members must buy own pensions

Provident funds have not been granted any further extensions to comply with the requirement that they must buy a pension at retirement.

Members of these funds have enjoyed the same tax deductions for contributions made to their funds as pension and retirement annuity (RA) fund members since 2016.

However, unlike members of pension funds and retirement annuities and following union threats to strike, these members have not yet been obliged to buy a pension with their savings when they retire.

Pension fund and RA members are required to buy a pension with two-thirds of their retirement savings at retirement. They may take only one-third in cash.

When the Income Tax Act was amended to grant the tax deductions to more than 1-million provident fund members, the implementation of the requirement that members below age 55 must, when they reach retirement age, buy an annuity if they have more than R250,000 in retirement savings, was postponed until March 2021.

The Budget Review notes that the so-called harmonisation of all retirement benefits — so that the tax benefits and the requirement to buy a pension are the same for pension funds, RAs and provident funds — is set to proceed following agreement between the government and the National Economic Development and Labour Council.

It also notes that the government will take steps to ensure that pension or annuity products from which retirement fund members can receive a monthly pension are more suitable for lower earners.

Costs on these products can be high for people with small amounts to invest.

The Budget Review notes that further retirement reforms will extend to improving the oversight and governance of umbrella funds which are sponsored by large financial institutions.

Automatic enrolment as a member of a fund — most likely for those in formal employment — is also listed as a future reform.

The Treasury also plans to introduce legislation later in 2020 that will centralise unclaimed benefits in a single fund and to establish a central registry of all members.

Chris Axelson, the chief director of economic tax analysis at the National Treasury, says the current fragmented system of unclaimed benefit funds is ineffective when it comes to finding people.

In addition, money in a centralised fund containing all unclaimed benefits could be used to invest in infrastructure until it is claimed.