How new provident fund rules affect you at retirement

If you’re a member of an employee provident fund or provident preservation fund, you should already know that the law changed in 2021, which affected how much you can withdraw as a lump sum at retirement. Before the law changed, provident fund members could withdraw the full amount they had saved when they retired.

This had made provident funds popular because, unlike pension funds, they didn’t limit your lump sum withdrawal at retirement to one third of savings. But that has changed, so the same limitation now applies to provident funds.

The changes in the laws relating to retirement investments, which came into effect on 1 March 2021, are designed to synchronise how provident funds and pension funds are managed and used, so that they’re easier to understand and regulate.

If you were 55 or older on 1 March 2021, then these changes do not apply to you, and you’ll be allowed to withdraw your entire savings at retirement. If you were younger than 55 on 1 March 2021, then the new law applies only to any contributions made on or after 1 March 2021 plus any growth from then on. The question you should really ask, though, is whether it’s wise to withdraw any of your savings as a lump sum when you stop working.

Here’s why.

Why the changes matter

When you’ve been working for 40 or 50 years, the one thing you’re looking forward to is some downtime. Your retirement, according to the picture painted in the brochures, should be your golden years that you enjoy in comfort surrounded by your loved ones.

This is certainly possible if you’ve planned and prepared for your retirement. But that doesn’t mean you can stop thinking about investments when you retire, because the pool of money you’ve saved is what you’ll live on for another 20 or 30 years.

Which is why the pension laws say you need to invest at least two-thirds (67%) of your savings in an annuity product when you retire. An annuity is a retirement investment vehicle designed to pay you an income every month based on a figure you set. This number is usually a percentage of your total funds that you want to draw in a year, calculated so as not to overdraw and deplete your savings too early.


It’s a smart move to invest in proper advice

Even though this annuity investment pays you an income, it should also be generating returns on the money that’s still invested. In this way your money could last a little longer if the investment returns outstrip inflation and your monthly income.

It makes sense, therefore, to put as much money as you can into an annuity rather than drawing a third of your savings as a lump sum at retirement.

The impact of not reinvesting at retirement

What if you take a portion of your savings at retirement instead of reinvesting it all in an annuity?

Let’s picture a scenario in which you’re 25 years old, starting your first job in 2022 and expecting to retire when you’re 65. We’ll assume you’re earning R15,000 a month, saving R2,550 a month (17% of your salary) and that your salary grows by 5% every year, as do your contributions.

For the sake of simplicity, we’re assuming that the average inflation over this period is 4% and your annual investment returns are 10%. Given this scenario, you should end up with around R25 million to provide income through an estimated 30 years or more in retirement.

However, if you choose to take a third of your savings as a lump sum, instead of lasting you at least 30 years in retirement, the money could run out after only 18 years, if you’re drawing the same income.

The eventual outcome will depend largely on how you use the approximately R8 million you withdrew as a lump sum. You might have invested in a business that generates income, which is fantastic provided that the venture is successful and sustainable. But business success is never guaranteed, so you might not get the income you had hoped for.

Assuming your investment doesn’t pan out, even if you’d taken only a 20% lump sum, you could run out of savings in 23 years, while a 10% withdrawal might see you through for only 3 years longer.

Trying to imagine what the future holds or will look like is incredibly difficult. However, cold, hard numbers like these highlight the challenges you might face in your old age if you make unwise decisions.

You’re not expected to be an expert in finance and investing, but there’s no reason you can’t get that expertise from an accredited financial advisor. It’s a smart move to invest in proper advice, so that your future is not only more certain, but also clearer.