Government has introduced a law that aims to encourage South Africans to save and plan better for their retirement. In December last year, President Jacob Zuma signed into law the Taxation Laws Amendment Act of 2015 to assist households and ensure that they are not vulnerable to poverty, especially during retirement.
The new law is not aimed at preventing public servants from accessing their pension monies when retiring or resigning. According to a circular from both National Treasury and the Department of Public Service and Administration (DPSA), the reforms coming into effect next month (March) seek to make provident funds similar to pension and retirement annuity funds.
Retirement Fund Director at National Treasury Alvina Thela said there had been a misunderstanding about the intention of the new law and as a result people were leaving their jobs out of fear that they would lose their money. “Don't resign because of false rumours. If you resign you will lose a lot of your retirement benefit because the benefit will be taxed heavily. This means that after the tax is paid you will be left with much less money.
“If your savings stay in your fund, your money will grow bigger and you will pay very little tax on your money when you retire. There will be a lot more money by the time you retire.”
Benefits of the new law
Thela said that the Taxation Laws Amendment Act had a number of benefits and would help people save money for retirement. “One of the advantages is that as a provident fund member, you won’t be taxed when you put money into a provident fund when you are saving for retirement.
“This is likely to increase your take home pay, so you’ll have money that goes into your provident fund that is not taxed meaning that your taxable income will be less and your net pay will be more.” The other benefit, said Thela, is that “you are encouraged to save because now you are able to contribute without being taxed and you will be able to save more for retirement and that will protect you from poverty at old age and protect you from relying on the state or your family members to take care of you”.
Different types of retirement funds
Contributions towards retirement can be done in three different ways namely: by making a contribution towards a pension fund, retirement annuity fund and/or a provident fund. A pension fund is similar to a retirement annuity fund in that when you contribute to those two funds, you get a tax deduction.
A tax deduction means that the money that goes into that fund is not taxed and this is different from a provident fund. A member that contributes to a provident fund gets taxed when the money goes into that fund. The other difference is at retirement and when you exit these three products. When you exit from a pension fund or retirement annuity fund, you get a third as a lump sum and the remaining two thirds are paid as an annuity.
A provident fund is treated differently. When you exit from a provident fund, you get a cash lump sum and your entire savings are given to you at one go. Thela has also encouraged people who want to resign and cash in on their retirement to get proper financial advice before taking their savings.
“Protect your retirement savings. Your retirement is your future income. Seek financial advice and protect and preserve your money when you change jobs or resign.”