Finance Minister Pravin Gordhan has significantly increased the portion of your retirement savings that you can take as a tax-free lump sum at retirement, and he has nominally increased the tax-free amount on any lump sum you withdraw before retirement.
The change to the taxation of the lump sum at retirement is part of an overhaul of the retirement tax regime that will largely take effect on March 1 next year, known as T-Day.
The date of T-Day was confirmed with the promulgation of the Taxation Laws Amendment Act, which gave effect to the proposals made in the Budget last year.
The key changes that will be implemented on T-Day are:
* You will be able to deduct both your and your employer’s contributions to a pension fund, provident fund or retirement annuity fund of up to 27.5 percent of your remuneration or taxable income, whichever is greater.
* There will be a cap of R350 000 on the total amount that you may deduct from your taxable earnings in a tax year. This is to prevent the wealthy from claiming excessive deductions.
* Your employer’s contributions, including any premiums for group life assurance, will be added to your taxable income as a fringe benefit, but they can be included in the deduction of 27.5 percent. Special formulas will be used to calculate the employer contributions to defined benefit and hybrid retirement funds.
* Contributions in excess of the annual cap may be rolled over for use in years when your deductions do not reach the R350 000 cap. You will be able to add the nominal value of any unclaimed additional amounts to the tax-free lump sum at retirement.
* Any new contributions made to a provident fund will be subject to the same annuitisation rules that apply to pension funds. This means that at least two-thirds of the savings must be used to buy a pension at retirement.