The compulsory annuitization of benefits from a provident fund, despite a laboured birth since 2016, becomes a reality on 1 March 2021. See 212 tsh 2020. In essence, the harmonization of tax treatment of all retirement funds, whether pension, retirement annuity or provident, vis-à-vis tax deductible contributions (since 1 March 2016), required the compulsory two-thirds annuitization of retirement funds to be applied also to provident funds, with effect as from 1 March 2021.
Exceptions for vested provident fund benefits
This annuitization is not retroactive, in that the value of vested benefits of provident fund members as at 1 March 2021, plus investment growth, may still be fully commuted upon, for example, retirement, since the two-thirds annuitization applies only to contributions and investment growth after 1 March 2021.
(Provident fund members who have attained a minimum age of 55 as at 1 March 2021 are granted a further full-commutation concession, since both existing and future contributions and investment growth remains fully commutable as a lump sum, provided that such a member remains a member of the same provident fund as at 1 March 2021, although I fail to understand the rationale behind the requirement to remain with the same fund.)
Tax treatment of lump sum at retirement
The aggregated lump sum comprising the vested benefits plus one-third of the fund-benefit value after 1 March 2021 is included in the member’s gross income upon retirement, under para 2(1)(a) of the Second Schedule to the Income Tax Act.
Deductions are allowed, under para 5, notably of the member’s own contributions to the provident fund, if these did not rank for a deduction under s 11F (enacted on 1 March 2016). (Before 2016 provident fund contributions by a member were not tax deductible, so, in practice, any such contributions were fully funded by the member’s employer, who could claim the deduction under s 11(l) of the Income Tax Act.)
The net amount, which is generally the full lump sum, since the deductions are usually inapplicable, referred to as the taxable income from lump-sum benefits, is taxed according to a specific table, which is ring-fenced from a taxpayer member’s other taxable income for the year of assessment. (The table aggregates all lump-sum retirement benefits from all retirement funds, plus any employment severance benefits). The tax rates are 0% up to R500 000, and thereafter graded at 18%, 27% and, finally, 36%.
The tax price is a flat 36% once the lump-sum benefit exceeds R1,050 million.
I suspect some members may prefer to take voluntary annuitization so as to manage and lower their tax rate, given that, under a living annuity, the annual drawdown amount can be as low as 2,5% of the fund-benefit value.