Legislation governing provident and provident preservation funds is changing on 1 March 2021. The changes are the final planned step in the process of aligning (also referred to as ‘harmonising’) the benefits and rules of provident and provident preservation funds with those of pension, pension preservation and retirement annuity funds, and are part of the National Treasury’s broader retirement reform initiatives.
What will be changing?
As things stand, provident and provident preservation fund members can take up to 100% of their benefits in cash at retirement. From 1 March 2021, new contributions made to provident funds, plus future investment returns on these contributions, will be subject to the same rules at retirement as benefits in pension, pension preservation and retirement annuity funds. In other words, members will need to use at least two-thirds of these benefits to purchase an annuity that will provide an income in retirement, unless these benefits in a fund are R247 500 or less, in which case they can still take up to 100% in cash. The same will be true if these benefits are transferred from a provident fund to a provident preservation fund.
For existing provident fund members who will be 55 or older on 1 March 2021, the above will not apply if they remain members of the same provident fund(s). These members will still be able to take up to 100% of their benefits in cash at retirement from contributions made to these funds from March 2021 onwards. In addition, all benefits in provident and provident preservation funds as at 28 February 2021, plus future investment returns on these benefits, will not be impacted by the change. Benefits not impacted by the change will be given ‘vested rights’ and members will still be able to take up to 100% of these ‘vested benefits’ in cash at retirement:
What will the changes mean?
| Existing members | Impact of the changes |
| Provident Preservation Fund members | No impact. All benefits in the fund as at 28 February 2021, plus future investment returns on these benefits, will be given vested rights. These vested benefits can still be taken up to 100% in cash at retirement. |
| Provident Fund members (55 or older on 1 March 2021) | No impact if remaining in the fund. All benefits in the fund as at 28 February 2021 and contributions to the fund from March 2021 onwards, plus future investment returns on both of these, will be given vested rights. These vested benefits can still be taken up to 100% in cash at retirement. These members will only be impacted if they start contributing to a new provident fund on or after 1 March 2021. |
| Provident Fund members (younger than 55 on 1 March 2021) | Benefits from contributions made to the fund from March 2021 onwards will be impacted if they exceed R247 500 at retirement. At least two-thirds of these benefits must be used at retirement to purchase an annuity that will provide an income in retirement, unless these benefits in the fund are worth R247 500 or less, in which case up to 100% can still be taken in cash. All benefits in the fund as at 28 February 2021, plus future investment returns on these benefits, will be given vested rights. These vested benefits can still be taken up to 100% in cash at retirement. |
The changes will have no impact on the circumstances under which Provident Preservation Fund and Provident Fund clients are able to access their benefits before retirement.
How vested rights will be treated
The vested rights given to your Provident Preservation Fund and Provident Fund will remain intact until you retire, even if these vested benefits are transferred to a different fund, including pension, pension preservation and retirement annuity funds. If a deduction is made from a fund before retirement (e.g. a withdrawal, a divorce order, etc.), this deduction will be taken proportionally across the benefits with vested rights and any benefits without vested rights.
To protect your vested benefits and to keep them separate from any benefits that do not have vested rights, from 1 March 2021 there will be separate accounts for benefits with vested rights and benefits without vested rights.
For Provident Fund members who are younger than 55 on 1 March 2021, there will be a new account for their contributions made to the fund on or after this date. From 1 March 2021, there will be two accounts, where a portion of the benefits has vested rights and the other portion does not.
While the benefits will be in separate accounts to protect and track a member’s vested benefits, they will still be viewed and administered as one set of benefits when it comes to retirement, transfers to other funds, or withdrawals. Where separate accounts have been created, these accounts will be linked to one another and will disclose this related account information in the same places as the vested rights information mentioned above.
For those joining a Provident Fund for the first time on or after 1 March 2021, all new contributions will be subject to the new rules at retirement. Any vested benefits transferred to such fund will retain their vested rights.
For further information on these changes please contact your Maximus Adviser.