Treasury tightens up pre-retirement withdrawals

rp_2013_7thumbimg104_Jul_2013_195711729-ll-300x201-150x150.jpgNational Treasury has tweaked its proposal on how much access to your retirement savings you will be allowed to have once it becomes compulsory for you to preserve your savings.

Treasury had suggested that, after legislation is introduced to prevent you from withdrawing your retirement savings before retirement, you be allowed one withdrawal per preservation fund each year, up to 10 percent of the value of your retirement savings.

Now, in a discussion document released this week, it is proposing to allow one withdrawal per taxpayer each year, up to 10 percent of the value of the fund from which you withdraw.

The aim, it says in the document entitled “2014 Budget update on retirement reforms”, is to reduce the number of withdrawals.

Once again, Treasury points out that any legislation introduced to make you preserve your retirement savings will not take away your rights to withdraw what you have saved up until the date the preservation measures are implemented.

In addition, National Treasury is considering amending how pre-retirement withdrawals are taxed, to ensure fairness and discourage withdrawals for frivolous reasons.

Treasury does not provide any further details about the above proposals, and the discussion document notes that they are being discussed at the National Economic Development and Labour Council. It says draft amendments to the Income Tax Act and the Pension Funds Act will be released early next year.

You can withdraw all your savings from a retirement fund if you leave your employer, and, in terms of proposals made in the Budget last month, and the first R25 000 will be tax-free. Withdrawals above the tax-free amount are taxed at ascending rates – 18 percent, 27 percent and 36 percent – depending on the size of the withdrawal.

Treasury’s latest document on retirement reform says the amount you will be allowed to take as a cash lump sum at retirement will be reduced by the amount you withdraw before retirement. Currently, the tax-free amount you enjoy at retirement is reduced if you have taken withdrawals before retirement.

Members of pension funds and retirement annuity (RA) funds can take up to one-third of their savings as a cash lump sum at retirement, with, in terms of recent Budget proposals, the first R500 000 tax-free. They must use the remaining two-thirds to buy an annuity.

Members of provident funds can take all of their savings as a cash lump sum at retirement. This will change from March 1 next year, when provident fund members under the age of 55 will have to use two-thirds of what they save after March 1 next year to buy an annuity, unless their accumulated savings after that date are less than R150 000.

Provident fund members who are aged 55 and above on March 1, 2015 will still be able to withdraw all their savings at retirement.

Members younger than 55 will, at retirement, be allowed to withdraw in full what they have accumulated by March 1 next year.

The retirement reform document released by Treasury this week also says it will by May this year release draft regulations that will require retirement funds to provide default investment options before and after retirement. These options are:

* Preservation of your savings in the retirement fund if you leave the fund before retirement, unless you choose to transfer your savings to your new employer’s fund or to a preservation fund with a financial institution. This means your savings will, by default, be preserved in your existing fund, unless you specifically request the fund to pay you out when you leave your employment and the fund.

Currently, by default a fund will pay you out when you leave your job, and it is up to you to ask the fund to transfer your savings to a preservation fund, the fund offered by your new employer, or an RA.

* Default investment portfolios if you don’t specifically instruct your fund in which portfolio to invest your savings.

* Default annuities at retirement.

Treasury says that, because the choice of annuity and product provider at retirement is critical to your financial security, it will require funds to employ financial counsellors – who may not receive commission – to guide you through the default annuity options and any other options you may consider.

Treasury says it will consult with the retirement fund industry on the draft regulations about default options.

Treasury’s latest document on retirement reform again has a major focus on bringing down the costs of saving for retirement, and Treasury says it will facilitate consultations with the Association for Savings & Investment SA to formalise an agreement in principle to lower costs in the retirement industry.

Among the issues highlighted in the document are:

* In May, the Financial Services Board will release its Retail Distribution Review report, which will contain proposals on how intermediaries should be paid for investment advice.

* Later this year or early next year, draft regulations will be released on how retirement fund charges can be calculated and how they should be disclosed. The document says it is currently not prescribed how retirement funds must disclose their charges, with the unit trust industry and the life industry using different methods, and the umbrella fund industry (for funds in which multiple employers participate) downplaying significant charges, such as those for investment management.

* Improving preservation, making enrollment with a retirement fund mandatory, consolidating funds, improving market regulation and simplifying retirement products are all on the reform agenda, with a view to making retirement savings more cost-effective.