Key points from the Budget Speech

The Budget Speech was very light on matters affecting retirement fund investors, and did not reference retirement reforms at all. Most significantly for retirement savers, the marginal tax rate for those earning above R1,5 million has been increased to 45%. This increases the tax benefit for high income earners on retirement fund contributions. The scope is limited however, in view of the rand cap of R350 000, which limits the effective retirement fund deduction for such individuals to 23,3%. Another consequence to this increase is that it pushes up the potential maximum effective tax rate on capital gains from 16,4% to 18%.    

The dividend withholding tax increases substantially, from 15% to 20%. This, too, makes it more attractive to shield investment returns in a retirement fund vehicle, which is not subject to tax on investment returns.

The annual permitted contribution to the TFSA has been increased from R30 000 to R33 000. As far as we are aware, the lifetime stays at R500 000 but it does mean that this can now be reached around one year sooner (15 years instead of 16 years).  

Impact on SA retirement savings

Miscellaneous tax amendments proposed for the upcoming tax legislative cycle are set out below:

– Preservation of benefits after reaching normal retirement dates: In 2014, the law was changed to permit individuals to retire without immediately drawing their retirement benefit (and paying tax thereon). It did not however permit the transfer of this benefit to another fund. It is now proposed that transfers of retirement interests be allowed from a retirement fund to a retirement annuity fund, subject to fund rules.

– Tax-exempt status of pre-March 1998 build-up in public-sector funds: Currently, the Income Tax Act provides the tax-free portion relating to pre 1 March 1998 service can be carried over on transfer from a public sector fund to a pension fund, but not on subsequent transfers. It is proposed that subsequent transfers of these lump sum benefits to another pension fund be tax free.

– Removing time limit to join an employer umbrella fund: Existing employees who do not join a newly established employer umbrella fund have 12 months within which to join the fund, after which they are unable to join. To encourage retirement saving Treasury proposes to scrap the 12-month limit, enabling employees to join without time restriction, subject to the rules of the fund.  This will be a welcome scrapping of a senseless rule.

– Applying the R350 000 deduction cap across the year: It is currently not clear how this cap should be applied when determining monthly employees’ tax. It is proposed that the amount of R350 000 should be spread evenly over the tax year.

– Default regulations to improve market conduct. The Budget Review suggested that the aim of the default strategies was to better protect members through lower charges and provide better value for money, especially to members who do not exercise any choice. (Unfortunately, this was not so apparent in the actual wording of the revised default regulations, which merely provided that charges should be cost-effective [“reasonable and competitive”] in the default portfolio.) The revised drafts addressed the industry’s blanket concern on performance fees and guaranteed products, but these may be reviewed in the final regulations published later this year. We hope so. Apparently, further steps to lower charges will follow.

One of our concerns with the revised default rules was that it excluded retirement annuity funds. Fortunately, another initiative, the Policyholder Protection Rules (which has been issued for comment) aim to reduce unfair termination penalties on savings policies. This could potentially save retail investors up to R1 billion over 12 years. These rules will also introduce strong requirements for how insurers must manage customer complaints.

– Annuitisation for provident fund members. Treasury hopes to push this through as planned, with effect from 1 March 2018. Discussions with NEDLAC and others on this subject are ongoing. If no agreement is reached, then government will review the continuation of the tax deduction for funds that do not annuitise part of their retirement savings, to ensure the tax system is equitable across all retirement funds. Treasury will also engage with the industry to provide annuity products that better suit the needs of low- and middle-income members of retirement funds.

– Automatic enrolment in retirement funds. Over and above the planned Social Security reforms, government is considering automatic enrolment to ensure more workers save for their retirement. This would encourage or require employers to automatically enrol their workers into a retirement fund, which could be sponsored by the employer or sourced from a third party.

– Exchange-traded funds referencing foreign assets. Government proposes that local collective investment scheme management companies registered with the Financial Services Board and regulated under the Collective Investment Scheme Control Act (2002) be allowed to list exchange-traded funds referencing foreign assets on South African exchanges. These funds will not be subject to macro-prudential limits on amounts that may be invested offshore. South African institutional investors and authorised dealers will be allowed to invest in such funds, subject to their respective macro-prudential limits. These funds will be classified as foreign assets for prudential purposes. The Reserve Bank has released circulars on these policy measures.

Chris Veegh is the CIO of 10X Investments.