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More options for those who prefer to ‘defer’ retirement

Proposed changes to the tax treatment of retirement funds will give retirees greater flexibility when it comes to transferring and withdrawing their benefits.

More and more people are opting to carry on working after reaching retirement age, and may soon have more choices when it comes to deciding what to do with their retirement benefits.

A proposed expansion of funds to allow for the more flexible transfer of retirement benefits was announced in the recently published Draft Taxation Laws Amendment Bill (TLAB).

National Treasury said in its explanatory memorandum that amendments in 2017 allowed employees to transfer their benefits from a pension or provident fund to a retirement annuity fund when they reached retirement age (the age as defined in the rules of the fund), but before they actually retire.

However, the act only allows transfers to a retirement annuity fund. Transfers to pension preservation and provident preservation funds have been excluded as it was thought that this would be administratively burdensome.

During public consultations, treasury was informed by industry players that the system changes required for transfers to pension and provident preservation funds would not be onerous.

Treasury has now proposed allowing for transfers from a pension or provident fund to a pension or provident preservation fund before people actually retire.

“These amendments increase the choice of available retirement funds in cases where individuals decided to postpone retirement,” treasury said.

Ronald King, head of public policy and regulatory affairs at PSG Wealth and a member of the South African Institute of Tax Professionals (Sait), says PSG fully supports the proposed changes.

“Retirees can earn income from another source while they still can, allowing them to only draw down on their retirement savings at a later stage. This increases the chances of them having enough to support them[selves] when they do retire.”

King says in terms of the rules of preservation funds, people are allowed to make a single withdrawal from the fund before retirement.

However, this withdrawal will not be permitted on the money that has been transferred to the preservation fund on the date of retirement from the fund.

“Put differently, if a person has before-retirement and after-retirement money in a preservation fund, they will only be able to withdraw the before-retirement money,” says King. “The only way to access [all] the money is to officially retire from the fund.”

Another proposed change relates to the alignment of preservation funds when South Africans emigrate, or when a person working in South Africa leaves the country after their working permit expires.

King explains that South Africans who officially emigrate from South Africa are allowed to withdraw the funds from their retirement unity fund, pay tax on it and take the remaining money with them out of the country.

A similar provision exists for expatriates when they leave South Africa on expiry of their work visa.

Treasury says in terms of current legislation only members of retirement annuity funds are able to access and withdraw the full value of their post-tax retirement benefits upon emigration or repatriation.

Members belonging to a pension preservation fund or a provident preservation fund are restricted from doing so.

According to treasury, as stated in its explanatory memorandum: “In order to promote government’s policy of a uniform approach on the tax treatment of all retirement funds, it is proposed that the tax treatment of different types of preservation fund withdrawals be aligned to allow members of all preservation funds to be able to access and withdraw the full value of their post-tax retirement benefits upon emigration or repatriation.”

King says in the past it has been unclear whether a taxpayer who has already made a withdrawal from their preservation fund would be allowed to make another one when emigrating. The proposed change gives clarity.

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