The costs you pay to preserve your savings until retirement could be significantly reduced if National Treasury’s latest reform proposals, which force you to preserve what is in your fund when you change jobs, are introduced, pension lawyers and trustees heard this week.
National Treasury’s latest reform document proposes that, from “P-Day”, in or after 2015, you will be required to preserve your retirement savings, and your fund will need to have a default preservation fund into which to move your savings as soon as you leave your job.
Currently, you may withdraw all your savings. In terms of the latest proposals, dubbed “preservation light”, you will be able to make only certain limited withdrawals from your preserved savings each year. However, anything you saved before P-Day will still be available to you.
Kobus Hanekom, head of strategy, governance and compliance at Simeka Consultants & Actuaries, an affiliate of Sanlam Employee Benefits, told the Pension Lawyers Association conference that if you don’t need the money immediately, it will be preserved in a “tax haven”, with no income tax, capital gains tax or dividends witholding tax.
In addition, a preservation fund set up correctly by your trustees will enjoy discounted wholesale costs compared with the high costs many people are currently paying to put their savings in retirement annuity (RA) or preservation funds.
This is a very good arrangement, Hanekom says. In addition, there will be no pressure on you to withdraw the money as a lump sum, because it will be available as and when you need it, he says.
John Anderson, head of research and product development at Alexander Forbes, told Personal Finance that funds will be able to set up group arrangements with lower administration and other costs.
In addition, he says, the increase in the amounts preserved would be hugely powerful in reducing costs.
Anderson says all this will be good for you as a consumer but material for the industry, which is likely to see a decline in RAs and a migration to institutional preservation funds.
Dr David McCarthy, retirement policy specialist at Treasury’s financial sector policy division, says about 90 percent of employees who resign from their jobs are sent a cheque from their retirement fund.
A key point of the proposals, McCarthy says, is that whatever you were entitled to withdraw from your retirement fund before P-Day, you will still be able to withdraw the day after P-Day. This portion of your savings, known as your vested rights portion, will always be available to you.
In addition, each year you will be entitled to withdraw the higher of 10 percent of your initial deposit in a preservation fund after P-Day or the annual amount of the monthly social old-age grant, which will be R15 120 (R1 260 x 12), he says.
McCarthy says you will not have to prove you need the money, and any withdrawal not used in a particular year can be carried over to the next year.
He says this means you will have to preserve 90 percent of your accumulated savings for at least one year after leaving your job, 80 percent for at least two years, 70 percent for at least three years, and so on. In addition, you will always have access to what you saved before compulsory preservation was introduced.
McCarthy says Treasury will make it mandatory when you change jobs or funds for your new retirement fund to accept your savings from the fund you are leaving.
He says the preferred outcome will be that when you change jobs you transfer your savings to your new retirement fund. The second best option will be that your savings remain in the preservation fund within your old fund, and the third best option will be that you transfer your savings to another preservation fund or retirement fund.
McCarthy also says Treasury would like to see the biases removed so that members are not forced to retire from their funds and draw an annuity when they are able to continue working. He says this will be part of the broader reform.
Hanekom says that if you are planning to take the full withdrawal benefit after P-Day, or your vested rights portion, you could incur additional costs by being forced to transfer your savings first to the new default preservation fund. But these costs should be minimal because the preservation fund should enjoy lower wholesale costs.
McCarthy says if you feel the fund’s default preservation option is not right for you, you will be able to elect to transfer your funds to a private preservation fund or RA.