On the 1st March this year better known amongst the financial community as ‘T’ day, a retirement reform initiative that our Government has been rolling out for a while now, took another step forward in the form of three further significant changes.

Provident fund changes

Without going into too much detail (much more can be learned from your Financial Advisor) Provident fund members under the age of 55 as of 1st March will need to take a portion of their retirement benefits in the form of an annuity – so this is also referred to as ‘annuitisation’.

This will align provident funds with pension funds which allow members to only draw a third of income at retirement and the balance is to be used as income in retirement. It’s important to note that T-Day changes only affect contributions made after T-Day and as provident preservation fund members cannot make contributions, existing members of provident preservation funds will not be impacted by these changes.

Portability allows tax benefits

The second change allows for greater ‘portability’ of retirement benefits across a much wider range of retirement funds. As a result of the alignment of retirement funds, members can transfer their benefits ‘tax-free’ to a wider range of retirement funds after T-Day. For example, members of pension funds will now be able to transfer their benefits to a provident fund ‘tax-free’, whereas this is currently taxed.

The third change will be made to the current pre-retirement ‘emigration’ withdrawal requirements for members of Retirement Annuities (‘RAs’) and pension/provident preservation fund members. Anyone considering emigration should talk to a Financial Advisor to get more detail on this.

What is this ‘Retirement funds reform and what are the objectives?’

For quite a long time there have been concerns about aligning various forms of pension but mostly what the government seeks to achieve is:

• The encouragement of savings in the form of pension funds to provide for a decent retirement – currently well below par in terms of the general population
• To encourage good governance and responsibility amongst employers to structure retirement saving plans for their employees as part of the employment contract
• To ensure that members of retirement funds are fairly treated and receive good returns for their retirement savings
• To generally improve the standards of retirement fund governance

We concur that these are all worthwhile initiatives and given that most of our population are woefully underinsured in terms of retirement they are very necessary reforms.

Some alarming realities

The 10X South African retirement reality report for 2020 makes for some sobering reading. it says that even prior to COVID-19 and the massive impact it had on our economy “South Africa was sitting on a retirement timebomb, with the data aligning very closely to a widely quoted National Treasury statement that only 6% of the country’s population was on track to retire comfortably!”

Ignorance of the kind of savings that will be required to retire comfortably did not even rank as the highest reason for this issue but rather the reality that few South Africans were even adequately prepared to face the COVID-19 situation and therefore saw retirement savings as a ‘nice to have’ rather than the necessity it is.
Worst of all, complacency amongst those on a retirement plan with employers was also an issue and as the report states; “more than 60% of those who had been (or still were) members of an employer’s retirement fund said they knew little or nothing about the fund or were not interested!”

Sound financial Advice lays a foundation for long term goals

It is only through sound financial planning that some are withstanding the battering of the pandemic and have sound retirement plans in place. At Hereford Group we understand the unique circumstances of every individual and business and it is all taken into cognisance before any long-term planning is strategized and implemented.
Talk to us before throwing up your arms and surrendering to circumstance. If there is a better way, we’ll find it and have you back on a path that includes retirement plans for a great future.

Stay positive and stay safe.