Emergencies and unexpected expenses happen, or there’s a sudden loss of income as experienced by many during the last 18 months. It’s then that people start wishing they could dip into their retirement funds. The money is there, it is yours and retirement is a long way off. Just a small loan …
Unfortunately, current legislation prevents access to retirement funds and the money is only available on retirement, when people resign, or when they lose their jobs.
For many, these ‘forced savings’ are the only savings they have – and pressure to allow people to use some of this money has increased to such an extent that National Treasury has issued an update on the progress of changes in relevant legislation to provide for access to retirement savings.
“In response to the many media queries, National Treasury wishes to provide more details on the approach and planned time lines concerning the proposal to allow for greater preservation with limited pre-retirement withdrawals from retirement funds,” reads the statement. “Even before the advent of Covid-19, the government recognised that many members may need to access part of their savings in particular unexpected circumstances.”
However, Treasury warns that new regulations and processes won’t be in place before next year. The explanation of the process indicates that it would be towards the end of 2022.
Former finance minister Tito Mboweni mentioned in the 2020 Medium-Term Budget Policy Statement (MTBPS) and the following national budget (2021) that access to some of the money in a retirement fund is under consideration, noting “limited withdrawals” from retirement funds under certain conditions, provided that this is accompanied by mandatory preservation upon resignation from a job.
This underlying motivation seems to speak largely towards preventing people from resigning their jobs for the sole reason of accessing their savings.
Since the earlier announcements, government has been engaging with trade unions, retirement funds, regulators and other stakeholders to discuss how to increase savings and improve preservation of funds, while still allowing limited withdrawals.
Treasury notes that early access will require changes in current legislation and in the rules and regulations governing pension and provident funds, and that this is a long and arduous process.
“Implementing any new system allowing limited withdrawals with preservation will take time, because in addition to prior consultation, legislative and fund rule amendments have to be done and fund administrators will also have to change their systems.
“Design work and consultation are ongoing, further announcements and the public release of the proposed measures for public comment and consideration will be made shortly, before or at the 2021 MTBPS [in October].
“It is envisaged that the necessary legislative amendments will be introduced in parliament thereafter,” according to Treasury.
It is expected that the earliest that any changes would become effective for a new withdrawal mechanism is 2022, according to the update.
It is noteworthy that the Government Employees Pension Fund (GEPF) is excluded at this stage because the proposed changes concern the Pension Funds Act, which does not regulate the GEPF.
The proposed changes to the Pension Funds Act would also not allow early withdrawals from retirement annuities (RAs).
Trade unions are likely to object to the fact that vast numbers of government employees and investors in RAs would not be accommodated, which could lead to delays in the process.
Treasury makes special note that retirement funds are primarily designed to encourage individuals to save while working so they will have money during retirement. “The government provides generous tax deductions and benefits to encourage all working people to save and preserve more for their retirement,” according to the statement.
It is a pertinent warning when looking at statistics which show that only a small minority of people in SA have the means to retire comfortably.
Government is suggesting a ‘two bucket’ system. One bucket is to be preserved until retirement, while the second bucket will allow for pre-retirement access during emergencies or extraordinary circumstances. It would not be surprising if the new legislation proposes a very tight lid on the first bucket; for instance, that people won’t be able to pry it off even when resigning from a job.
Rosemary Lightbody, senior policy advisor at the Association for Savings and Investment South Africa (Asisa), says the association and its members look forward to engaging with National Treasury on shaping the proposed two-bucket system, but that it is important to note that this will not be an overnight process.
According to Lightbody, changes to the current retirement benefit access rules will require amendments to the Income Tax Act, possibly also the Pension Funds Act, and various other legislation. In addition, says Lightbody, administrators of retirement funds would need to make extensive system changes before a two-bucket system could be facilitated.
More importantly, she says members of pension, provident and preservation funds need to realise that their current (restricted) access rights are highly unlikely to change.
“Future changes to access will in all probability only be applied to contributions made after new legislation has taken effect.”
She also notes that Asisa members (life offices and fund managers) have been inundated with queries from their clients about these changes.
The pressure on accessing retirement funds since the subject was raised by Mboweni is noticeable in that Treasury asks members of retirement funds not to contact their retirement funds to withdraw funds unless retiring, resigning or retrenched.
“Retirement funds are legally not empowered to allow pre-retirement withdrawals until the law is enacted,” it says. “It is expected that any changes to the law would only become effective next year at the earliest, and some of the medium-term provisions may take even longer to take effect.”
Most financial advisors, asset and investment managers, and pension fund administrators would advise people against using their retirement money prematurely.
The R1 million or R2 million in a retirement fund might look like a lot, and retirement might seem years away. It isn’t – ask the 83-year old couple complaining about the price of a salad in a restaurant.
And the problem is worse for people with only a few hundred thousand in their retirement fund.
Annalise De Meillon-Muller, manager of distribution and sales support at Glacier by Sanlam, points out that a recent survey by Sanlam showed that about 75% of retirees in SA are reliant on government’s old age grants as their main source of income once they retire.
Just to put the state’s old age grant into perspective: “The maximum amount that you will get is R1 890 per month. If you are older than 75 years, you will get R1 910,” according to the South African Social Security Agency (Sassa).
The new proposals are in a sense at odds with stated retirement reforms implemented since the early 2000s to ensure that people save for their old age. Granting earlier access to retirement savings is not an easy thing to put in place, considering the intention of the retirement reforms and the importance of ensuring preservation of retirement provisions, says De Meillon-Muller.
“It is important to remember that withdrawing from your retirement savings prior to retirement has a detrimental impact as the future retiree will have less capital with which to purchase an income.
“They will lose out on a lot of compounding growth on the capital withdrawn,” she says.
“If there is any other way to survive and pay off debt without dipping into your retirement capital, then that is preferable. Your savings in a retirement fund is protected from creditors and has tax benefits.”
Glacier by Sanlam refers to comments by Treasury officials that one possible outcome of changes in legislation is that people would be allowed to access up to one third of their retirement savings earlier, rather than the current regulations which only permits the withdrawal of a lump sum of a third at retirement.
However, if somebody withdraws a third earlier, subject to income tax, no further withdrawals will be allowed at a later date or at retirement, according to the current ideas being discussed.
However, De Meillon-Muller warns: “There is very little chance of recovering from such a withdrawal in monetary terms and it is of the utmost importance to not make this decision lightly, and certainly not without the professional advice of a financial advisor.”