By Brett Ladouce
The lives of provident fund members will look a lot different on September 2, 2024 than it was on February 28, 2021. The reason for this is that two significant changes to legislation would have been implemented that changed the way retirement and withdrawal benefits are paid to provident fund members.
The first notable change took place on March 1, 2021. Before that date, provident fund members were allowed to receive up to 100% of their fund benefits as a lump sum cash benefit at retirement. As of March 1, 2021 fund members who were under the age of 55 years on that date are only allowed to take the accumulated retirement savings as of March 1, 2021 plus investment growth until the date of retirement (“vested portion”) as well as one-third of the accumulated fund contributions after March 1, 2021 and investment growth thereon until the date of retirement (“non-vested portion”) in cash.
Fund members who were over the age of 55 years on March 1, 2021 and who retire from that same fund at a future date will still be allowed to take 100% of their full retirement benefit as a lump sum retirement benefit when they retire. The situation that is applicable until August 31, 2024 in relation to provident fund members is illustrated in Example 1 below.
Example 1:
Mr X and Ms Y both decide to retire or resign on 31 August 2024. Their respective cash lump sum retirement or withdrawal benefit will be calculated as follows:
| MR X | MS Y | |
| Age on 1 March 2021 | 54 | 56 |
| Vested Portion on 1 March 2021 | R 1 000 00 | R 1 000 00 |
| Vested Portion on 31 August 2024 | R1 200 000 | R1 500 000 |
| Non-Vested Portion on 31 August 2024 | R 300 000 | R 0 |
| Maximum Lump Sum Withdrawal Benefit on 31 August 2024 | R1 500 000 | R1 500 000 |
| Maximum Lump Sum Retirement Benefit on 31 August 2021 | R1 300 000 (R1 200 000 + one third of R300 000) | R1 500 000 |
The second notable change for provident fund members will happen on September 1, 2024 when the Two Pot System is implemented as it will limit the cash-withdrawal benefit amount that a member can take out of the fund at withdrawal before retirement. For all members who were younger than 55 years on March 1, 2021 three pots will be created, namely a vested pot; a savings pot; and a retirement pot.
The vested pot will consist of all contributions up to August 31, 2024 and investment growth thereon and the fund member will have access to the full value in this pot as a cash lump sum benefit at withdrawal before retirement. One-third of fund contributions after September 1, 2024 (and investment growth thereon) will go into the savings pot and the fund member is entitled to take the full value in the savings pot as a cash lump sum benefit at withdrawal before retirement.
Two-thirds of fund contributions after September 1, 2024 (and investment growth thereon) will into the retirement pot and members will not be able to access the money in this pot until they retire, as all the money in this pot must be used to buy an annuity at retirement. Provident fund members who were 55 years or older on March 1, 2021 will not participate in the two pot system and will still be able to take 100% of their retirement money as a lump sum cash benefit at withdrawal, unless they decide to opt in to participate in the two pot system.
Example 2:
Mr X and Ms Y retire or withdraw from the fund on 31 December 2035.
| Mr X | Ms Y | |
Age on 1 March 2021 | 54 | 56 |
| Vested Portion on 1 March 2021 | R 1 000 000 | R 1 000 000 |
| Vested Portion on 1 September 2024 | R1 200 000 | R1 500 000 |
| Non-Vested Portion on 1 September 2024 | R300 000 | R0 |
| Vested Pot on 1 September 2024 | R1 500 000 | R1 500 000 |
| Savings Pot on 1 September 2024 | R0 | R0 |
| Retirement Pot on 1 September 2024 | R0 | R0 |
| Vested Portion on 31 December 2035 | R1 920 000 | R3 000 000 |
| Vested Pot on 31 December 2035 | R2 400 000 | R3 000 000 |
| Savings Pot on 31 December 2035 | R200 000 | R0 |
| Retirement Pot on 31 December 2035 | R400 000 | R0 |
| Lump Sum Withdrawal Benefit on 31 December 2035 | R2 600 000 (Vested Pot+ Savings Pot) | R3 000 000 |
| Lump Sum Retirement Benefit on 31 December 2035 | R2 220 000 (Vested Portion + one third of Non-Vested Pots on 1 September 2024 + Savings Pot | R3 000 000 |
The examples above illustrate how complex it will become in future for members to calculate lump sum retirement and withdrawal benefits for them to make informed decisions when they decide to retire or to withdraw from the fund. Without the assistance of the fund officials, the HR department of the employer, and a financial adviser, fund members will probably not be able to make informed decisions in relation to their retirement planning when they leave the fund. Only effective member education can stop the “confusing tale of the five pots” from turning into the disastrous tale of uninformed member decisions.
PERSONAL FINANCE