Tax Smart: Rethinking Provident Fund Withdrawals

So just to explain that for a second . So the reform is not in place yet , but what's going to happen is between Treasury and the retirement fund industry and the unions . They've agreed that there needs to be a way where a portion of your retirement funds going forward or into the future will always be saved until the point where you actually retire .

So just to explain that , at the moment , if you work for a company , the likelihood is that your retirement fund is a provident fund and if you resign your job , you are allowed to take your provident fund , cash it in and then get access to that money .

The problem with that strategy is that you pay enormous amounts of tax because all of the money that you take out of your provident fund gets added to your taxable income in the year and then you end up paying tax as a big lump sum on that retirement money that you've taken out .

So basically you could end up losing a big chunk , a quarter or a third of your money to tax . And usually people are doing that because they're in real financial difficulty and so they can't afford to lose that money . And then , secondly , they have quit their job , you know .

And that's , you know , much more worrying , because most of the time people are quitting their job to access their retirement fund money because they're in desperate trouble financially and they don't necessarily have another job . So now the problems just really compound against them and it's a really unhealthy situation .

So the reform now let's call it the two-part system will say that from a given day at the moment it's supposed to be September 2024 , I suspect that that's going to be pushed out , but let's just say it's September From September 2024 , all the money that you've put into retirement funds up until that day will be unchanged .

So whatever the laws are that apply to those retirement funds until the beginning of September will be in place . So nothing's going to affect you with your retirement fund . If you're 62 and about to retire , this is not going to be an issue for you .

But if you're 22 and you've saved no money into a retirement fund and you're about to start , then you will be entirely affected by this and I want to say affected is a good thing in this situation . This is an excellent reform . It's long overdue . You shouldn't be worrying about this . You should be really happy about it .

But what they're going to do is they're going to say a portion of your money will go into , let's call it , a savings pot and another portion will go into the compulsory pot . The compulsory pot is the part you're not allowed to touch .

So that will be money that will be locked away and it will be the bulk of the money and you will only be able to access that when you retire , let's just say for most of us , at age 55 or older .

So the savings part will be a much smaller amount and every year you will be allowed to take a portion of your retirement fund from the savings part and you can then access that money .

If you have to Remember it's not an obligation that you must access the money the more you leave in your retirement funds , the better , and there will be a tax implication on taking that money out . So it's not like it's tax free . It's still going to be taxable and it's still going to be a bad financial decision for you to take that money out .

So it's not like it's tax-free . It's still going to be taxable and it's still going to be a bad financial decision for you to take that money . But it's a much better route than people quitting their jobs , cashing in their whole retirement funds when actually they need a smaller amount of money to settle a personal loan or an overdraft or something like that .

So I think it's a good call . I'm not too worried about it . The question that we received was a little bit more detailed , and it was actually a great question was is there going to be a difference in the way that those two pots of money are invested by the retirement fund managers ?

In other words , will the savings pot potentially be a bit more cautious or more conservative , with a very high cash balance , and then the balance of the money that's in the compulsory part , will that be , you know , invested , you know , long term in growth assets like shares and property companies and bonds , etc .

I'm not sure that that's going to happen , because the savings part is not something that people will be expected to draw on every year . It's really there for emergencies and really bad emergencies Now , not just something , that you have an emergency holiday you need to go on . This is really kind of a bad outcome when you take money from your retirement funds .

So even though it's called a savings pot , I don't think it's a savings account where you're kind of getting a fixed deposit interest rate or something like that . This is really about retirement fund money that you're drawing out too early because you've got a real financial emergency .

So I suspect that the money will be invested the same and it's going to be an accounting thing where they keep track .

The retirement fund administrators will keep track of how much money you've got in each of those two pots the savings pot and the compulsory pot and whether you've drawn money from the savings pot this year or not , and then they will allow you to draw that money out according to the regulations .

So I suspect that it will be one big pool of money that gets managed the way it always has been , but the rules around accessing the money will be different .

I would be very disappointed if retirement fund managers start to manage that pool of money differently , because what that will mean is that they'll take a portion of your money and invest it too conservatively if you're , let's say , 25 years old , and potentially too aggressively if you're 63 and about to retire .

So I think that these reforms are not about changing the way money gets invested . It's more about how the money gets accessed and when you're allowed to access it . So thank you for the question . I think it's a fantastic question .

I just think we're probably still a little way off from when this whole thing's going to be done , and so keep watching this space . And , as I said at the start of the recording , I'm not sure that we will get the retirement refund reforms done by the beginning of September .

Government , as usual , did all of this stuff far too late , after they had years and years to work on the regulations , and then just sprang it on the industry and kind of forced them to kind of implement . And they actually wanted to implement from the beginning of March 24 and then extended it by six months to September .

The logical thing would have been to publish the announcements and then give the industry 12 months to get all their systems right . But of course we're dealing with government that doesn't understand how systems work , so it's a tricky one .

But I suspect we can watch the space to see how these regulations are actually implemented correctly and then from there you can make some decisions .

I would expect that , if they're going to change the way your money is invested , that they will give you a choice to say okay , my savings pot should be invested the same way as the rest of my money , because I don't really want to draw on it , you know , on a regular basis . But , as I said , I just don't really want to draw on it on a regular basis .

But , as I said , I just don't think that that's the case . I think this will be same as usual in terms of the way your money gets invested . On that note I'm going to wrap up . Thank you so much for all your questions . Please keep sending them .

It gives us great insights as to what you want to know from us , and we'll do our best to give you a sensible answer .