Retirement fund members and the industry that serves them will have an opportunity to comment on an amendment to the Income Tax Act that will delay the requirement that provident fund members buy a monthly pension or annuity at retirement until 2018.
National Treasury this week published the Revenue Laws Amendment Bill, which will, if passed by Parliament, bring the postponement into effect.
The public have until Wednesday to make submissions and public hearings will be held on Thursday this week and next week.
The bill proposes amending the certain provisions of the Taxation Laws Amendment Act that Parliament, after much deliberation, passed last year.
The Income Tax Act was initially amended by Parliament in 2013 to introduce uniform tax deductions for contributions made to both pension and provident funds.
This amendment means that from Tuesday, you will be able to deduct from your taxable income contributions made to a pension or provident fund up to 27.5 percent of your taxable income or remuneration, whichever is higher, up to a deduction of R350 000 a year.
The new deductions give most pension and retirement fund members, except very high earners, the benefit of a bigger tax incentive to save for retirement, and provident fund members, will, for the first time, receive a tax deduction for any contributions they make to their retirement savings, which should increase their take-home pay.
However, provident fund members were, in return for the deduction, expected to give up their right to take their savings in full as a lump sum at retirement.
In terms of the Amendment Act of 2013, they were expected at retirement to withdraw as a cash lump sum only one-third of their savings made in provident funds after the amendment became effective and to use the other two-thirds to buy a monthly pension.
The 2013 amendment included a number of exceptions:
* Provident fund members aged 55 and over on the implementation date were exempt from the obligation to buy a pension at retirement.
* Any savings provident fund members had put into a retirement fund before the implementation date and any growth on these savings after the implementation date could still be withdrawn as a cash lump sum at retirement.
* Members would not be required to buy a pension at retirement if their savings were low – initially the threshold amount was R75 000, but late last year this minimum was increased to R247 500.
There has so far been no attempt to change the fact that members of pension and provident funds can still withdraw all their retirement savings when they resign their jobs before retirement.
The implementation date for the amendments was originally set for March 1 2015, but a threat from the Congress of South African Trade Unions (Cosatu) to call a general strike resulted in a last-minute delay in the implementation of the law to March 1 this year. The postponement came with a promise from Treasury to continue engaging with the unions and employers through the National Economic Development and Labour Council (Nedlac).
Late last year, Treasury told Parliament that the Nedlac negotiations had failed to reach consensus and, after considering the matter, Parliament’s finance committee recommended that the changes be implemented, but the minimum amount provident and pension fund members would need to have saved before they would be obliged to buy an annuity was raised to R247 500.
After last year’s amendment was signed into law, Cosatu again threatened to strike, noting its objections to trustees deciding on the allocation of death benefits, the cost of annuities bought at retirement and cross-subsidisation within annuities.
Cosatu is demanding that any clauses which prevent workers from making lump-sum withdrawals from provident funds be scrapped. It also demands the release of a comprehensive social security reform discussion paper rather than piecemeal retirement reforms.
In his Budget speech this week, Finance Minister Pravin Gordhan referred to the social security reform programme without committing to any timelines.
He also said that, as part of the reform, the government will seek tighter regulation of the retirement funding industry to protect your savings and ensure they are “not dissipated by unnecessary administration and financial costs, and that an income in retirement is assured”.
Ismail Momoniat, the deputy director-general of tax and financial sector policy, says regulations covering defaults for retirement funds, expected to be issued this year, will include measures to bring down the costs of annuities by forcing funds to provide these or negotiate good rates from providers, ensure members get advice about annuities and will ensure improved and more appropriate annuity options for widows and orphans of deceased retirement fund members.
There is no reference in the bill to the tax deductions that provident fund members will receive from March 1 being removed in the future, but this step is likely to be considered if, by 2018, there is still no agreement about annuitisation for provident fund members.
The Revenue Laws Amendment Bill released on Thursday also proposes a correction to the calculation of the deduction from taxable income for contributions made to defined benefit retirement funds – funds that provide a pension at retirement based on years of service and final salary.
RETIREMENT SAVINGS: CHANGES ON THE CARDS
The Budget Review indicates that the following amendments or regulations afffecting your retirement savings will also be considered in the year ahead:
* Allowing you to roll over contributions made before March 1 to a pension or retirement annuity fund that were not allowed for a tax deduction.
Steve Nathan, the chief executive officer of 10X Investments, says this means that any unclaimed contributions can be claimed as deductions, subject to the available limits in any tax year, despite the change in the tax deductions from March 1. You will not have to wait until you access these savings, on either retirement or withdrawal, to reap the tax benefits, he says.
* Allowing financial institutions to stay in breach of offshore limits as a result of the depreciation of the rand for a period of 12 months, but not to make any new offshore investments while they are in breach. This will prevent them from being forced to reduce your offshore exposure to comply with Regulation 28 of the Pension Funds Act at a time when this may not be to your best advantage.
Nathan says this will allay investor fears about reducing foreign holdings during this period of heightened currency volatility. A higher offshore allocation for the 12 months will reduce your exposure to the risks in South African markets.
* National Treasury intends to publish the final default regulations later this year. It says the key elements of these regulations include:
* Making it mandatory for you to join an employer’s retirement fund;
* Improving the disclosures retirement funds are obliged to make;
* Setting up good default investments and default annuities at retirement for fund members;
* Consolidating the number of funds to save on costs;
* Simplifying retirement savings products and enhancing competition by allowing you to move your savings between providers; and
* Ensuring that you get good advice and service from your fund.