Three things you should know about retirement reform

retirement 1Author: Ing Lamprecht (Moneyweb).

Unpacking annuitisation, the increased deduction and the implications for high net worth individuals.

Regulations toharmonise the tax treatmentof retirement fund contributions are set to be introduced from March 1 next year, but questions remain about whether the reforms will really encourage household savings and improve the plight of vulnerable individuals.

This article looks at three of the changes and their broader ramifications.

1. Provident funds compelled to annuitise two-thirds of pension, but only once a R247 500 threshold is reached

From March 1 next year allnewcontributions to provident funds by those younger than 55 will be subject to the two-thirds annuitisation requirement at retirement (provident fund members will only be able to take one third of their pension benefit as a cash lump sum and the remaining two thirds will have to be annuitised), but only once a members retirement savings exceed R247 500. The previously proposed threshold was R150 000.

Provident fund members could previously take their full pension benefit as a cash lump sum at retirement.

In a Question and Answer document released by National Treasury, it emphasises that the reforms do not take away the right of provident fund members to take their benefits before or at retirement.

“Instead, the reforms enable a slower use of such benefits in retirement by requiring annuitising from a certain amount. The data indicates that 83.5% of provident fund members earn R160 000 or less, and that the majority of these retire with an average retirement benefit of R300 000 or less, it said.

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This article first appeared on moneyweb.co.za.