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Pravin’s big retirement changes on track

You need to gear up your retirement planning to meet T-Day and P-Day, when government will implement major changes to the R3-trillion retirement savings industry.

T-Day and P-Day are days when retirement fund reforms are scheduled to be implemented in or after 2015, with legislation based on government’s latest proposals for retirement reform being put before Parliament this year. The proposals are outlined in a discussion paper titled “2013 Retirement reform proposals for further consultations”.

Illustration: Colin Daniel. Credit: PF

This latest discussion document, released this week with the Budget, consolidates reaction to four discussion documents published last year on various aspects of retirement reform, including the preservation and taxation of retirement savings.

Apart from T-Day and P-Day, a number of other reforms will be implemented to boost the protection of your retirement savings, including the enforcement of better behaviour by your retirement fund trustees and measures aimed at reducing costs. The reforms also propose to bring statutory funds, such as the Government Employees Pension Fund and the Transnet funds, under the ambit of the Pension Funds Act, giving members the rights enjoyed by members of non-statutory pension funds.

T-Day

The recommendations for the still-to-be-set T-Day will affect the taxation of your retirement fund contributions. The recommendations change those made last year by Finance Minister Pravin Gordhan, which were scheduled for implementation on March 1, 2014. The latest recommendations are:

P-Day

Government is proposing tighter controls on preserving retirement savings, but it will allow you to access savings before retirement during periods of unemployment.

However, vested rights will be protected to avoid a repeat performance of people resigning their jobs or getting divorced to get their hands of their retirement savings.

Recommendations for the preservation of retirement savings are:

Consideration is also being given to relaxing the preservation requirements of RA funds, from which you currently cannot make any withdrawals before the age of 55. (When you do reach 55, two-thirds must be used to purchase a pension).

Treasury is considering allowing RA fund members to transfer their balances to preservation funds, under conditions that will prevent them from seeking out additional tax advantages. The conditions may include preventing individuals who have transferred money out of an RA fund from rejoining that fund, or, alternatively, from receiving a tax deduction in respect of any RA contributions, for a period.

TREASURY INTENT ON OVERHAUL OF LIVING ANNUITIES

Investment-linked living annuities (illas) are due for a major overhaul to ensure that pensioners using them are not left financially destitute before they die because of high costs, poor advice, wrong investment choices and drawdown rates that are too high.

Life assurance companies are set to lose their stranglehold on the provision of illas, with government proposing that the requirement of a life assurance licence to sell illas be dropped.

It is proposed that collective investment scheme management companies such as unit trust and exchange traded fund companies be allowed to sell illas without, as they currently need to do, registering as a life assurance company or renting a life assurance licence.

National Treasury hopes this will increase competition and bring down costs.

It says most respondents to an earlier discussion paper pointed out that an important factor underlying the choice of annuity at retirement was that people with a low level of savings tended to choose illas in the hope that, because they allow for higher initial pension payments than conventional annuities, they could maintain their living standards.

Most respondents were in favour of reforming, rather than replacing illas.

Treasury says:

Illas are also part of the scope of the Treating Customers Fairly initiative.

Treasury says the progress of these reforms will be monitored through detailed compulsory reporting by product providers on annuity (pension) purchases made by individuals retiring from funds, investment charges and the asset mix of illas, and the purchase prices and terms of conventional annuity policies.

GOVT PONDERS COMPLEXITY OF SECURITY FOR LOW EARNERS

Government must still spell out the details of how it intends extending the retirement system to all employed individuals, particularly those in low-income groups and in irregular employment, who are mainly excluded from the current system and rely entirely on the social old-age grant, which will be increased from R1 200 to R1 260 a month.

The Budget Review says the retirement reform proposals released with the Budget “will lay the foundation for the eventual introduction of a mandatory tier of a comprehensive social security system that provides death, disability and retirement cover to all workers”.

The backbone of the extended system is likely to be the proposed National Social Security Fund (NSSF).

Patrick Craven, spokesperson for trade union federation Cosatu, in reacting to the Budget proposals, says the federation is increasingly frustrated by government’s failure to introduce comprehensive social security that will ensure that nobody falls through the safety net.

Cosatu also rejects the piecemeal reforms of the retirement funding system and wants retirement reform to be part of comprehensive social security reform.

But in its discussion paper, Treasury says the situation is complex. Currently, about half of formally employed workers are members of an employer-sponsored retirement fund. An analysis based on a labour force survey carried out in 2010 by the Centre for Research into Economics and Finance in Southern Africa indicates that 86 percent of workers who don’t belong to retirement funds earn less than the tax threshold, indicating that they receive no tax benefit for saving for retirement. Of these, nearly 40 percent work in sectors where employment can be erratic.

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