Retirement savings: no need to panic

Copy of PF 23Aug pg1 Colin Daniel

Retirement funds were this week urged to allay fears among members about retirement reform, including the changes to the law that come into effect in March next year.

Next year’s changes deal with the tax deductions for contributions you make to retirement funds and the payouts from provident funds.

The preservation of your retirement savings during your working life and other retirement reforms will not be implemented next year – they are still under discussion.

However, some members are confusing the different reforms, feeding rumours and often ungrounded fears when, in fact, for most members, next year’s changes will either be beneficial or have little effect.

Several speakers at this week’s annual Institute of Retirement Funds Africa conference in Durban urged funds to explain to you, their members, what the changes will mean for you.

The only way to address the fears is to face members, Johan Botha, the divisional manager of consulting at retirement fund administrator NBC Holdings, told the conference.

Beatrie Gouws, an associate director at auditing, tax and advisory firm KPMG, says members are likely to have lots of questions about the new system, and employers, human resources managers, trustees and fund administrators need to come together and plan how to communicate with members to ensure that they make informed decisions.

Here are some things you need to know about the changes coming in on March 1 next year:

Employer contributions and fringe benefits tax

The contribution your employer makes to your retirement fund will reflect on your payslip as a fringe benefit and will increase your gross remuneration.

However, the intention is that, in 99.9 percent of cases, the increase in remuneration will be offset by the increased tax deduction for retirement fund contributions, Gouws says. You will be allowed to deduct a total contribution of 27.5 percent of the higher of your remuneration or your taxable income, but limited to R350 000 a year. Any excess contributions can be rolled over for deduction in future years.

This roughly equates to the 20 percent your employer is currently allowed as a tax deduction for contributions on your behalf plus the 7.5 percent of your retirement-funding income you may deduct for contributions to a retirement fund.

In other words, the addition of the taxable fringe benefit should result in “an in and an out” on your payslip, Gouws says.

Some members fear that the fringe benefit will be added monthly, but that they will enjoy the deduction for the benefit only when their tax return is assessed. Gouws says this is not the case: employers should be able to make the deduction and adjust your pay-as-you-earn tax monthly.

You will be an exception to the rule only if you or your employer contribute much more to your retirement fund than the allowed deductions, she says – for example, if you and your employer contribute more than R350 000 a year or if the total combined contribution exceeds 27.5 percent of your remuneration or taxable income.

If you are a member of a defined benefit fund (one that pays a defined pension based on your years of service and final salary), your fund will provide your employer with a factor that must be used to calculate the “notional” amount of the fringe benefit you enjoy when your employer contributes to your defined benefit fund. This “notional” amount, rather than the actual contribution, will be added to your income and, together with your contribution, allowed as a deduction.

Botha says that your payslip will become a mini-cashflow statement recording every cent that flows between you and your employer, and your employer could also use the opportunity to reflect your retirement fund values on your payslip.

Gouws says your employer and your fund should explain to you how much of the contribution to your fund is allocated to retirement savings, what is being paid in premiums for life or disability cover, and what is being paid in costs – both before and after March 1.

Gouws says that if you see on your payslip what your employer is contributing to your retire-ment fund, you may value your savings more and be more likely to preserve them.

Opportunity to save on tax

Many retirement fund members will have an opportunity to increase the tax-deductible contributions they make to a retirement fund.

Provident fund members, who did not get a tax deduction on their contributions, will now get a deduction, and this could result in an increase in their take-home pay, Botha says. This will present an opportunity for funds and employers to encourage employees to use the additional income to contribute more to their retirement savings without any change in their take-home pay.

Botha says provident members earning R10 000 a month and contributing R750 will see an estimated R135 increase in their take-home pay. For every R100 a month in tax saving you reinvest in your retirement fund at an assumed return of 10 percent, you could have R7 717 at the end of five years, R20 145 at the end of 10 years and R40 162 after 15 years, Botha says.

Members who earn below the tax threshold of R70 000 a year, however, will not enjoy a saving, because they do not pay any tax.

Other retirement fund members may also have opportunities to increase their retirement-funding contributions and enjoy a higher tax deduction than they do currently.

If the contributions you and your employer currently make to your retirement fund are less than 27.5 percent of your remuneration, you will have an opportunity to increase your contributions and benefit from pre-taxed savings.

If your current contributions are based on retirement-funding, or pensionable, income and you earn non-retirement funding income such as a bonus or travel allowance, you will be able to contribute 27.5 percent of this income to a retirement fund.

Even if you contribute 15 percent of your non-retirement funding income – the current maximum allowed for a tax deduction – to a retirement annuity, there will be an opportunity to increase your contributions to 27.5 percent.

There may also be opportunities to increase your contributions because the new deduction will be based on the higher of your taxable income or your remuneration, whereas currently it is based on either your retirement-funding income or your non-retirement-funding income.

Some employer-sponsored funds allow additional voluntary contributions; others are expected to change their rules to allow for these from March next year.

Trustees at the conference were urged to submit rule changes for the funds as soon as possible to avoid the rush and “a bottle neck” at the Financial Services Board close to next year’s deadline for the implementation of the changes.

ANNUITISATION FOR PROVIDENT FUND MEMBERS

Provident fund members will encounter some changes when the process to convert their funds into pension funds starts next year.

Two-thirds of what provident fund members contribute after March 1 and the growth on these savings will, with a few exceptions, have to be used to buy a monthly pension (or annuity) when you retire. This means that only one-third, and not the entire amount, as is currently the case, will be available as a lump sum on retirement.

However, there is an exception: if the value of your contributions plus the growth on them does not exceed R150 000 at retirement, you can take the full amount in cash (this is known as the de minimus rule).

The full amount will still be available as a withdrawal benefit on resignation.

The amount that provident fund members have saved until March 1 next year, plus growth on this amount, will still be available as a lump sum on retirement, and members aged 55 or over on March 1 will be able to access all they have saved in a provident fund as a lump sum on retirement – these are known as their “vested rights”.

The aim of these measures is to encourage members of provident funds to use their retirement savings wisely to provide a pension for the rest of their lives.

Johan Botha, the divisional manager of consulting at NBC Holdings, highlighted a few implications of the changes this week:

* Provident fund members, who have until now often not concerned themselves with such matters, will need to know the types of pensions they can buy on retirement and the impact of their decisions. They will need to understand the difference between a guaranteed life annuity, which guarantees a pension for life but has no value after a certain period or on death, and a living annuity, in which you take the risk that the investments will provide a pension for life.

* Provident fund members will no longer be able to take their full benefit as a lump sum on disability.

Currently, if provident fund members become disabled, they are paid their disability assurance benefit and their savings as a lump sum. From March 1 next year, their right to take the disability benefit as a lump sum is not protected in the same way as is their right to take what they have saved in their retirement fund, Botha says. This means they will, as is the case with pension fund members, get an ill-health benefit on disability.

Members under the age of 55 will be able to take whatever they have saved in their provident fund up until March 1 as a lump sum, but two-thirds of any further amounts saved, plus any lump sum disability benefit (subject to the de minimis rule), will have to be used to buy an annuity that provides an ill-health benefit, Botha says.

* Provident fund members aged over 55 on March 1 next year will not have to buy an annuity with their savings if they stay in their provident fund. But if they move to a new fund, the contributions to the new fund and the growth on these contributions will have to be used to buy an annuity.

* Funds could incur additional administration costs as a result of running two portfolios – one for the amounts that can be withdrawn in full as a lump sum on retirement and the other for amounts that must be used to buy an annuity, Botha says. Funds must decide who should carry the additional costs: all the members, or only the members with pre-March 1 savings.

Muvhango Lukhaimane, the Pension Funds Adjudicator, urged funds to ask administrators for a comparison of the tasks they perform now and what they will do differently after March 1 next year and to adjust their fees based on the work involved.

WARNING: DON’T RESIGN TO GET AT YOUR ACCUMULATED SAVINGS

Retirement fund members, including teachers who are members of the Government Employees Pension Fund, are reportedly resigning from their jobs to access money in their funds, in the mistaken belief that they may be denied access to their savings in the future.

These members are confused by the retirement reforms. There are currently no measures in place to force them to preserve their retirement savings on resignation from their job. This is an issue that is being discussed by government, labour and business, but to date there are no formal proposals.

What will take effect from next year is that, only when they retire will provident fund members be obliged to use two-thirds of what they have saved from March 1 next year to buy an annuity (monthly pension). However, whatever you have saved up to that date will still be available as a lump sum on retirement – known as your vested rights (see above).

Should measures to compel you to preserve your retirement savings on resignation be introduced, they would be only for future contributions, and would still give you access to your savings in an emergency.

Members who contemplate resigning to withdraw their retirement savings should be aware that, on withdrawal, only R25 000 of your savings is tax free, whereas at retirement R500 000 is tax free. The tax-free amount on retirement is also negatively affected by any pre-retirement withdrawals you make.

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