Question:
Hi I am planning on resigning next year February or March. With the implementation of P-day happening 01-03-2014, will that affect me should I decide to withdraw my full lump sum or invest it in a preservation fund? Would I be able to still take the lump sum or would I not be able to do so with the implementation?
Answer:
Melissa,
The proposed legislation will not prevent you from accessing your retirement savings preserved before P-day, pre-retirement, as National Treasury intends to protect vested rights. But it is not quite that simple, and you need to read the comments below very carefully. Also remember these are still proposals, not law.
Your vested rights at implementation date (P-day, more likely 1 March 2015 than 2014) will be protected, but only "for as long as they remain in THAT particular fund" (per the paper). The vested portion is defined as the fund balance on P-day, plus the subsequent investment return on that balance. The fund balance can refer either to the amount in your pension/provident fund, or in your pension/provident preservation fund.
Note we are emphasizing the word "that". Once members leave the fund they belonged to on P-day (and move to another employer fund or to a preservation fund), the further investment return on that balance ceases to be a vested right. The vested right is therefore limited (in a somewhat arbitrary fashion).
The amount transferred into a preservation fund after P-day is called the initial deposit. The initial deposit is reduced by any vested right. The initial deposit, as defined, becomes a critical number as it helps define the amount the member may withdraw from the preservation fund on an annual basis thereafter (10% of their initial deposit).
Members who already belong to a preservation fund on P-day have a vested right provided they have not already made their one permitted withdrawal under the current regime. The full balance on P-day is deemed to be the initial deposit, which is then reduced by the vested right. Investors who have already made their one permitted withdrawal under the current regime forfeit their vested right on the remainder.
What this convolution means for you: if you transfer your retirement fund to a preservation fund before P-day, the entire amount (plus subsequent investment return) will be deemed as a vested right, and you can withdraw this money before retirement. In fact the proposals make it easier for you to access this money. Presently, you may only make one (full or partial) withdrawal before retirement; the new proposals would give you multiple bites at the cherry, so you could consume your vested right over a number of years before retirement.
In other words, the proposed legislation should not discourage you from preserving your savings.
