Don't resign from your job in the mistaken belief that the proposed rewrite of the Pension Funds Act, which will include changes to the taxation of retirement savings, will result in you being forced to use all your money in a retirement fund to purchase an annual pension.
This warning comes from Baron Furstenburg, a senior member of the National Treasury task team that is re-writing the Pension Funds Act.
Although the proposed tax changes are likely to be announced when the second draft paper on retirement reform is released before the end of the year, it could be three to five years before a new Pension Funds Act becomes law and the new tax measures are in place.
Retirement funds are reporting that an increasing number of fund members are considering resigning before their retirement date, because the first draft paper on retirement reform, which was released last year, indicated that the government wants people to withdraw their retirement savings as a monthly pension, rather than as a lump sum at retirement.
Members believe that if they resign before retirement they will be able to access a portion of their savings as a lump sum, but if they wait until retirement, and the legislation changes, they may not be able to withdraw a portion as a lump sum.
Currently, members of pension funds can withdraw about R120 000 of their savings tax-free, and the balance is taxed at the members' average rate of taxation, which is generally lower than their marginal tax rate. Members of provident funds are entitled to take their entire contributions as a lump sum less tax.
Vested rights
Furstenburg says Finance Minister Trevor Manuel is very passionate about vested rights, and people will not automatically lose their rights to make lump-sum withdrawals.
Furstenburg says a phase-in period for the legislation can be expected.
Many people took early retirement in 1997 after the Katz Commission recommended changes to retirement fund taxation. But, apart from the introduction of a tax on the income earned on retirement savings in the build up to retirement, the recommendations were not implemented. As a result, people who took early retirement ended up being financially disadvantaged.