Tax effect on lumpsum benefits received from a provident fund
The Minister of Finance announced Government’s intention to introduce extensive retirement reforms to promote a culture of retirement savings approximately eight years ago. One could argue that the Government is looking to assist protecting retirees by enforcing compulsory preservation and making it difficult for hard-earned savings to be withdrawn by way of a lump sum. Throughout this 8-year period various consultations were undertaken between industry bodies and Government, with a final decision being made that the requirements for provident fund annuitisation will come into effect on 1 March 2021. This change impacts active members of a provident fund as at 1 March 2021.
The change is aimed at aligning the different types of retirement funds and enabling greater portability of benefits between retirement funds. Therefore, the annuitisation requirements for provident funds will be brought into line with those of pension and retirement annuity funds. From 1 March 2021, on retirement, provident fund members will be able to take a one-third lump sum benefit from their fund and structure a monthly income from the remaining two-thirds.
The above rules only apply to the retirement event. Should a taxpayer exit a provident fund due to resignation, retrenchment or dismissal, a withdrawal option is still available and is unaffected by the annuitisation.
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