T-day is here!
15 January 2012
Tax harmonisation and retirement reforms
The Taxation Laws Amendment Act, 2013 is in effect from 1 March 2016. This law allows for a 27.5% tax deduction, up to a maximum of R350 000 per annum, for all retirement fund contributions. It was due to be implemented on 1 March 2015, but was delayed by one year to take into account concerns raised by some stakeholders. The Act, published in the Government Gazette on 8 January 2016, has increased the amount required for compulsory annuitisation at retirement to R247 500. A review of this amount will take place two years from the effective date.
How will the new legislation impact provident funds and its members?
- All members
Members of provident funds will now be able to claim a tax deduction on their contributions. The contributions their employers make to their provident fund will also become visible on their payslips. Most fund members who make contributions to their provident fund (not via employer contribution) will see their take-home pay increase as a consequence.
All provident fund members will still be able to take all their retirement savings that would have been accumulated as at 1 March 2016, and the growth thereon, as a cash lump sum when they retire.
- Members younger than 55 on 1 March 2016
All new contributions to provident funds after 1 March 2016 by those younger than 55, and the growth on these contributions, will be subject to the annuitisation requirement once the value when they retire exceeds the threshold noted below.
The conversion of a portion of the retirement money into income at retirement will only apply to new contributions made by those who are younger than 55 from when the legislation comes into effect.
Fund members who are below 55 on 1 March 2016, will not be asked to annuitise or take a pension on the portion of new contributions if the total of those accumulated savings are R247 500 or less when they reach retirement. Irrespective of age, whatever a member has accumulated in the provident fund as at 1 March 2016, and the growth on those amounts will be available to them as a cash lump sum when the person retires (i.e. protection of vested rights). For most low- and middle- income fund members, it will take several years to reach the threshold, and hence many years before they have to annuitise at retirement.
- Members who are 55 years and older on 1 March 2016
The annuitisation of a portion of the retirement money at retirement will only apply to new contributions made by those who are younger than 55 when the legislation comes into effect which means that members who are 55 and older on 1 March 2016, will not be affected, i.e. they will still be able to take contributions made as a cash lump sum at retirement (after tax).
Vested rights for provident fund members who are 55 and older on 1 March 2016 will be fully protected if they remain in the same fund. However, if the member transfers to another fund, they would be required to annuitise two-thirds of any future contributions to the new fund. A 55 year old who changes funds, for example in June 2017, will have amounts accumulated till then as a vested right and those amounts can be preserved in the same fund or transferred to another. However, new contributions thereafter will not enjoy the vested right.
What are the objectives of the tax and retirement reforms?
The reforms seek to achieve the following:
- Simplify the tax treatment of contributions to retirement funds (current system is complex and confusing);
- Improve vertical equity between high and low income taxpayers by imposing a limit on the total allowable deduction for high income taxpayers;
- Improve horizontal equity by harmonising the same deduction across all retirement funds;
- Enhance post-retirement income by extending the requirement to purchase an annuity to provident funds;
- Protect vested rights, thereby ensuring that the impact of annuitisation takes longer to be felt by provident fund members.
When will compulsory preservation come into effect?
Preservation is expected to be introduced some time in the future. Whatever form it will take, it will not be full preservation; i.e. fund members will still be allowed to access some of their money before retirement. Full vested rights will also be granted. A date for effecting preservation has not yet been announced as there is still no policy decision on the exact and final nature of the preservation rules. Preservation is still a proposal that is open for public comment and debate.