While South Africa’s National Treasury is still contemplating updates to our retirement funding regime and following public consultation processes to determine the best way to enable early access to retirement savings, it’s important to know exactly what you can and can’t do with your South African provident fund in the interim. Although it was anticipated that these amendments would be made at the beginning of 2022, the wheels of change turn slowly in South Africa – this is unsurprising given the enormity of the task at hand. In addition to requiring major legislative overhauls, any new system that allows limited withdrawals while prioritising saving preservation will take time because fund rules will need to be amended and fund administrators will also have to change their entire systems.

Provident fund rules South Africa

What is a provident fund and how does it work?

Much like a pension fund, a provident fund is a retirement savings vehicle provided by employers to their employees as part of their employment package. Governed by the Income Tax Act and the Pension Funds Act, a provident fund is intended to ensure that you can provide an income for yourself once you decide to formally retire from working.

Changes made to provident fund rules in 2021

Important changes to taxation laws were made last year, including updates to the rules that govern withdrawals from provident and provident preservation funds. These changes came into effect on 1 March 2021, bringing the rules of all retirement funds into alignment in order to create a consistent retirement fund system across all types of retirement funding vehicles. This process is known as ‘harmonisation’.

Before 1 March 2021:

• If you were a member of a provident or provident preservation fund, it was possible to withdraw the full 100% of your retirement benefit as a lump sum on retirement, once you’d paid the tax on the non-tax-exempt portion.
• This was in contrast to members of pension or pension preservation funds and retirement annuities who could only encash one-third of the retirement benefit at retirement, making it compulsory to spend the remainder on purchasing an annuity income.

After 1 March 2021:

• Provident funds are now subject to the same rules at retirement as pension funds and retirement annuities, except where members were already 55 or older at that date and remained a member of the same provident fund.
• As an existing provident fund member, all accumulated funds as at 28 February 2021 have been given ‘vested rights’ and have not been impacted by the harmonisation legislation.
• This means that at retirement it will still be possible to withdraw 100% of the provident retirement funds as long as you are still a member of the same fund.
• If the benefits are transferred to another fund, the member retains ‘vested rights’ on the interest accumulated until the date of transfer from the old fund, including all subsequent growth. Any contributions made into the new fund plus any growth on contributions can only be withdrawn subject to the new annuitisation rules.

Please note: these new provident fund withdrawal rules do not affect pre-retirement withdrawals. You will still have access to withdraw funds if you resign before retirement.

Bringing provident funds into alignment with retirement annuities and pension funds: the 33.3% lump sum cap

While members of pension and retirement annuities have always been restricted in that they can only take one-third of their savings as a cash lump sum on retirement, from 1 March 2021 provident funds will be treated the same. When formally retiring from a provident fund now, you will need to spend at least 66.7% of your savings to purchase an annuity to pay out a regular income (your pension) at monthly, quarterly, bi-annually or annual intervals.

Exceptions to the new rules of provident funds

Every rule comes with exceptions. Where you are already 55 years old or older on 1 March 2021, you will be exempt from the new withdrawal procedures. As such, you will still be able to take the full amount as a lump sum of cash on retirement, as these harmonisation changes will not be implemented retroactively.

• This means that your fund value as it stands on 28th February 2021 can still be taken out as a lump sum on retirement, including growth on that amount.
• If the sum total of your provident fund assets accumulated after 1 March 2021 is still not more than R247 500, changes will not apply and you can withdraw your provident fund savings in full.

Transfers between provident funds and other retirement plans, simplified

One of the results of the new harmonisation legislation is that transferring funds from provident funds to pension funds will be easier, bringing them more in line with retirement annuities and pension plans.

What’s not changing in provident fund withdrawal rules?

Regardless of whether you change jobs, are dismissed or retrenched, at this point you will still have access to your provident funds – both vested and non-vested rights.

FinGlobal: financial solutions for South Africans abroad

Got questions about your provident fund? If you’re emigrating or you’ve already left South Africa, you’re probably wondering what to do with the funds you’ve stashed for retirement. FinGlobal can assist. We can help you to cease your South African tax residency and move your money out of South Africa.

Simply leave us your contact details and we’ll be in touch to answer all your questions. This personal consultation is completely free and without obligation.