Three important legislative changes that affect your personal financial planning

Taking care of your finances isn’t just about being good with numbers. Taking care of your money is also about keeping up to date with legislative changes. A few major updates have taken place in the past few months, so it’s important that you’re aware of the implications and how you are affected. Let’s take a look at four recent legislative amendments that can have an impact on the way you plan your financial future.

What you need to know

Section 37C of the Pension Funds Act: retirement savings and your will

If you’re saving for your retirement using a vehicle that is governed by the Pension Funds Act (in other words you have a retirement annuity, pension, provident or preservation fund) then you should pay careful attention to Section 37C of the Pension Funds Act. Particularly when planning for what happens after your death.

Chances are that these retirement savings will form a large chunk of your accumulated wealth but when drafting your will and doing your estate planning, it’s important to note that retirement fund benefits do not fall into your estate. These savings are not subject to estate planning laws, and instead the updated rules of Section 37C of the Pension Funds Act will determine what happens to this money after your death.

This means that if you pass before you retire from the fund and a lump sum is payable on your death, it becomes the duty of the fund trustees to allocate and pay the benefits in a manner deemed fair and equitable. In other words, you can indicate who you would like the funds to go to using the beneficiary nomination form, but the ultimate outcome is at the trustees’ discretion. Trustees will make this decision by determining who is dependent on you, either entirely or partially, and there is no guarantee that your funds will be distributed according to your intentions. Why is this? The main reason that the government is so generous with tax benefits for retirement fund investors is to encourage them to save for retirement and reduce the burden on the state. As such, if you die prematurely, Section 37C carries out this intention by ensuring that your financial dependents are taken care of.

In performing their duty, retirement fund trustees will carry out an investigation to ascertain who is financially dependent on you. It does not matter whether you are legally required to maintain them, which means that your financial dependents can include  children, step-children, foster children, parents, grandparents, spouses, life partners (what most people call ‘common law spouse’) as well as same-sex partners, and even unborn children, or anyone else that the trustees deem to be dependent on you for financial support.

How does this change affect you?

• Retirement fund benefits do not form part of your deceased estate. This means that you shouldn’t mention them in your will, as this might lead to unnecessary complications in winding up your estate.
• Because these assets fall outside of your estate, they can be used to reduce your estate duty liability and executor’s fees.
• When setting out your estate plan, keep in mind the effect of Section 37C in distributing your assets fairly between your heirs and beneficiaries and ensure that your will deals clearly with assets that do fall within your estate, and that the beneficiary nominations that relate to your life insurance policies are up to date and correctly structured in line with your intentions.

Updates to the definition of spouse: it means different things in different legislative scenarios

Marriage might seem like an outdated institution, but it does bring with it clarity. If you live together with a life partner but you are not legally married under South African law, you will need to be aware of the fact that various legislation assigns different meanings to the term ‘spouse’.

• For example, the Medical Schemes Act makes provision for a cohabiting partner to be included as an adult dependent on the main member’s medical aid regardless of marital status.
• For tax purposes, the Income Tax Act allows for a spouse include a same-sex or heterosexual union, as long as the Commissioner is satisfied that this union is intended to be permanent. Accordingly, falling within this definition means that you and your life partner can use tax exemptions for donations made between you.
• The Section 4(q) Estate Duty Act estate duty abatement is also available to life partners. Furthermore, if one life partner bequeaths immovable property to the other, in the event of their death the surviving partner will not be liable for transfer duty.
• As life partners, you can nominate your partner as a beneficiary to any South African life policy and when you die, the proceeds will be paid directly to this named partner. Because you fall within the  definition of ‘spouse’ for tax purposes, the proceeds will not be considered deemed property in your estate and as such there will be no estate duty payable.

On the opposite end of the scale, several other pieces of legislation take a much stricter approach to defining a spouse, such as the Divorce Act, the Marriage Act, and the Maintenance of Surviving Spouses Act. For example, the right to claim a share of your spouse’s pension interest is limited to those couples who are legally married.

Another thing to bear in mind is the fact that a legal marriage creates a duty of support between parties, which is not the case with cohabitation. If you and your life partner break up, there is no legal duty on either of you to provide any financial support. In a similar vein, where the Maintenance of Surviving Spouses Act provides an avenue for surviving spouses to claim from the estate of their deceased spouse to the extent that the other spouse failed to provide for them financially (i.e: they were not taken care of adequately in the deceased’s will), there is no such relief for a surviving partner in a cohabiting relationship.

How does this change affect you?

• Cohabitation (aka living together) might be more flexible, these kinds of relationships come with a handful of financial risks that you will need to ensure are taken care of.
• Although you may gain the same tax benefits as legally married persons, and you can be listed as a dependent on your partner’s medical aid, keep in mind that there is no duty of support that is legally recognised between you and your partner – both while you are alive and after death.
• If you are committed to your relationship and you intend to provide for each other adequately, it is important to have a cohabitation agreement in place. This is to determine the financial implications of your union and should specifically address the financial consequences of the termination of the relationship, whether by death or mutual agreement.

Changes to the Taxation Laws Amendment Bill

The latest Taxation Laws Amendment Bill came into effect on 1 March 2021. These updates include important changes to the regulation of provident and provident preservation funds, in terms of which the rules of all retirement funds were aligned. The thinking behind these legislative changes was to establish a unified retirement fund system across all types of retirement funding vehicles.

Before 1 March 2021, members of a provident or provident preservation fund could take 100% savings as a lump sum on retirement after tax, while members of pension or pension preservation funds and retirement annuities could only take one-third of the retirement benefit in cash at retirement, with the remaining two-thirds being used to purchase a compulsory annuity income.

After 1 March 2021, provident funds are subject to the same rules at retirement as pension funds and retirement annuities, except for provident fund members who were already 55 or older. As long as you remain a member of the same provident fund, your savings balance as at 28 February 2021 will be treated with ‘vested rights’, and accordingly the harmonisation rules will not apply. This means that at retirement from your provident fund, you can withdraw 100% of your retirement funds as long as you still belong to the same fund. However, where you transfer your savings to another fund, ‘vested rights’ will be attributed to the interest accumulated until the transfer date, including growth until that date. Any contributions to the new fund plus any growth on contributions will be treated under the new, harmonised annuitisation rules.

If you were a provident fund member younger than 55 when the harmonisation came into effect on 1 March 2021, this updated rules will apply only to contributions made after the effective date and all contributions and growth that came before this date will be given vested rights.

How does this change affect you?

• If you’d already celebrated your 55th birthday before 1 March 2021, you can still access the full amount of your provident fund benefit as long as you are still a member of the same fund.
• If you were not yet 55 on 1 March 2021, you can access 100% of your vested rights, while your provident fund benefits that accumulated after the effective date will be treated under the new annuitisation rules.

FinGlobal: cross-border financial specialists for South African expats

Keeping up with all these legal changes can be confusing, particularly when it comes to cashing in your retirement annuity and transferring the proceeds abroad. FinGlobal can help you understand exactly which rules apply to your situation, and help you calculate what to expect from a tax perspective.

For expert assistance in migrating your finances abroad, please leave your contact details and we’ll be in touch to discuss your cross-border requirements.