From 1 March 2016, a number of retirement and tax reforms introduced by National Treasury will take effect. Designed to create a simpler and uniform retirement savings regime,
the value and purpose of these new laws has not been clearly communicated to the public.
This lack of clarity is believed to have caused wide spread misperceptions around retirement reforms. Ultimately, it forced Government to postpone the compulsory annuitisation of provident funds at retirement for another two years.
If we don’t tackle these issues now, we’ll be sitting in the same predicament in 2018. It’s important to immediately clarify some of the burning issues related to vested rights, tax deductions on contributions, as well the ability of members to access their fund benefits on resignation or dismissal.
Uniform tax deductions across all types of retirement fundsPresently, there are different tax deduction limits on contributions to pension, provident and retirement annuity funds.
From 1 March 2016, these limits will be standardised across all three types of retirement funds, at a maximum of 27.5% of gross remuneration or taxable income (whichever is the higher), subject to a cap of R 350 000 per annum. There is presently no monetary cap on tax free deductions so this is changing.
This also means that from 1 March provident funds members will enjoy the same tax deduction on their employee contributions as pension fund members. Presently, provident fund members do not receive a tax deduction for employee contributions. The new laws change this, so these members should now see an increase in their take-home pay.
Clarity on resignation benefitsUnder both the old and new regime, members can withdraw 100% of their provident or pension fund (including the Government Employees Pension Fund) if they leave their employer before reaching normal retirement age.
By cashing out early, people don’t only forgo the future investment return on those savings, compounding over many years, but also valuable tax benefits.
For example, members who draw all their savings from their pension or provident fund, will only receive a tax-free benefit on the first R 25 0000 drawn as opposed to the R 500 000 tax-free portion available on lump sum payments at retirement.
The tax table for lump sums taken before and at retirement is shown below:
Annuity requirements for Provident FundsOne of the Government’s objectives for these retirement reform was to reduce the likelihood that pensioners outlive their savings. It wants retirees to become less reliant on the State or their immediate family for financial support.
National Treasury therefore wanted provident fund members to invest at least two-thirds of their fund balance relating to contributions made after 1 March 2016 in either a living or guaranteed annuity.
Following an outcry from employees and trade unions, Government and National Treasury have decided to postpone this requirement at least until 1 March 2018. Either provident fund contributions will then be subject to the same annuitisation rules as pension funds, or the proposal will be abandoned. If the requirement is scrapped, then National Treasury will probably reduce the tax deductions available to provident fund members.
It’s important to point out that contributions to all provident funds remain the property of the member and they continue to have the right to invest all or a part of their savings into an annuity of their choice.
These annuities are provided by the private sector (investment and life insurance companies) and not by Government. Contrary to another misperception, any money remaining when the annuity holder dies does not go to the State. With a living annuity, any remaining capital goes to the nominated beneficiaries. A guaranteed annuity ceases on the death of the annuity holder, unless it includes a guaranteed portion or a spousal benefit.
Vested rights and misconceptions around provident fund reformsIt important to emphasise that if annuitisation does become compulsory for provident funds from 1 March 2018, it will not jeopardise the member’s existing rights in respect of their savings. The annuitisation requirement will only apply to provident fund contributions made after 1 March 2018, and on the subsequent return earned on those contributions.
The provident fund balance on the day before these reforms become effective, and any subsequent returns on that balance, will remain under the old rules. There will be no need for employees to panic or resign to access their retirement savings.
Together with better regulation of the industry, improved market practices and more informed consumers, these reforms will play an important role in helping investors attain greater financial freedom. The legislation will ultimately offer investors more protection and will afford savers a more secure retirement.
Steven Nathan is the CEO of 10X Investments.