Please note that from 1 March 2021, changes which affect the manner in which a provident fund member will be able to take a retirement benefit will come into effect. These changes were signed into law by President Ramaphosa and published in the Government Gazette of 20 January 2021.
One of the changes will be that on retiring from a provident fund, the portion of a member’s fund credit which is accumulated after 1 March 2021 will be treated similarly to that of a pension fund. This means that only up to one-third of the fund credit after 1 March 2021 can be taken as a cash lump sum. This does not apply to members who have already turned 55 years of age, as their benefit entitlements remain unchanged. This change also does not impact on any fund credit accumulated up to 1 March 2021
Do not cash out all your savings
This news may spark off a rush by some members to cash out all of their savings by resigning from their employment before 1 March 2021. However, this is not advisable for the following reasons:
- This will defeat the very purpose of the new changes, which is an attempt to ensure that as many citizens as possible save money so they are able to look after themselves financially after retirement, and so ensure they live comfortably in retirement and put less strain on the State’s resources.
- Provident fund members no longer pay tax on their contributions, so it reduces a member’s tax payable to SARS.
- From 1 March 2021, there will be no differences between pension and provident funds.
- The member will also lose out on death and disability benefits provided by the funds as well as the investment returns earned on contributions.
- There are significant tax penalties for employees surrounding early withdrawals. If a member opts to take a withdrawal benefit, he or she will end up having to pay tax on it at a significantly higher rate than that paid at retirement.
A member who was paid-up in a fund before 1 March 2021 is not affected and can take a full cash benefit.
Employees who wish to submit their resignations for this reason should be aware of the following:
- Any provident fund savings up to 1 March 2021 will not be affected by the change and that full amount can be taken in cash on retirement – in other words, no changes to the existing situation.
- Members who are 55 years or older on 1 March 2021 will not be affected by this change at all if they remain a member of the same provident fund until retirement.