The government’s announcement this week that the requirement that provident fund members must buy an annuity at retirement (or annuitisation) will be delayed for two years should not scupper your retirement plans.
From next month, most members will still have a tax incentive to contribute more to their retirement funds, and, for the first time, provident fund members will be entitled to a tax deduction on their contributions. Contributing more – and benefiting from the tax incentive to do so – is one of the main ways of ensuring that you will retire financially secure.
However, the tax benefits for provident fund members may be short-lived, because the tax deduction for contributions will not continue after March 1, 2018 unless there is agreement that these members must annuitise their savings at retirement.
Here’s how the changes will affect you and the issues you should consider:
TAX DEDUCTIONS FOR CONTRIBUTIONS
Pension funds (including the Government Employees Pension Fund) and retirement annuity (RA) funds
Most members are likely to receive a tax deduction for higher contributions to their retirement funds from March 1.
Currently, members can deduct from their taxable income contributions to a pension fund up to 7.5 percent of their retirement-funding remuneration or R1 750 a year, whichever is higher. From March 1, they will be able to contribute up to 27.5 percent of their taxable income or remuneration, whichever is higher.
Ferdie Schneider, the national head of tax at BDO South Africa, says the base on which the deduction is calculated will be extended to include rental, investment and other non-salary income, which are currently used only for the calculation of the tax deduction for RA contributions. The maximum annual tax deduction will be R350 000, but only people who earn more than R1.2 million a year are likely to reach this threshold.
If your employer contributes to your pension or RA fund, this contribution will be added to your taxable income as a taxable fringe benefit, but it will be offset by the new, higher deduction. Currently, employers can contribute up to 20 percent of your remuneration, but many contribute less. If your employer does contribute less, from March 1 you will be able to benefit from the deduction by increasing your own contributions.
Alternatively, Schneider says, your employer may increase your salary and leave you, as the employee, to make the contributions. This would require changes to your fund’s rules. Group life premiums will increase if your pensionable salary is increased, which could result in more cover, unless the way in which group life cover is determined is changed.
From March 1, self-employed people will be entitled to a tax deduction of up to 27.5 percent on RA contributions, instead of 15 percent, as is currently the case.
Provident fund members
Currently, provident fund members cannot claim a tax deduction for their contributions to a provident fund.
From March 1, they will be entitled to a deduction of up to 27.5 percent of their taxable income or remuneration, whichever is higher. The maximum annual tax deduction will be R350 000.
Your employer’s contributions to your provident fund will be added to your taxable income but will be offset by the deduction. If no agreement is reached over the annuitisation of provident fund savings made from March 1, 2018, the tax deduction will fall away, which will then affect members’ take-home pay.
ON RESIGNATION (NO CHANGES)
Members of pension funds, including the Government Employees Pension Fund, and provident funds will still be able to withdraw their retirement savings in full on resignation. Withdrawing your savings on resignation is not in your interests, because you pay tax on any withdrawal over R25 000, jeopardise your chances of receiving a sustainable income in retirement and reduce the R500 000 tax-free lump sum that you can take at retirement.
Members of RA funds cannot withdraw their savings before the age of 55, unless they are in ill-health or emigrate.
AT RETIREMENT
Defined-contribution pension funds and RA funds (no changes)
Members can take up to one-third of their savings as a lump sum, of which up to R500 000 is tax-free if they have not made any pre-retirement withdrawals.
Members must buy an annuity (monthly pension) with the remaining two-thirds of their retirement savings, unless their savings are below the threshold. On March 1, the threshold will increase from R75 000 to R247 500.
Defined-benefit pension funds (no changes)
Members of defined-benefit funds, such as the Government Employees Pension Fund, receive a pension in line with their years of service and final salary.
Provident funds (no changes until March 1, 2018)
Currently, members can withdraw their retirement savings in full at retirement, and it was announced this week that they will continue to be able to do this until at least March 1, 2018.
The tax law was amended to force provident fund members to buy an annuity at retirement with two-thirds of any savings made after March 1, 2016. An urgent amendment to the Income Tax Act will postpone this change until March 1, 2018.
The maximum tax-free withdrawal at retirement remains R500 000, but it will be less if you have made any pre-retirement withdrawals.
The changes that will come into effect from March 1, 2018 may be amended, but National Treasury is proposing that the changes that were due to be introduced on March 1 this year come into effect then. If this is the case, the following will apply:
* Provident fund members will be able to take up to one-third of their retirement savings as a lump sum. They will have to buy an annuity with two-thirds of any contributions they make to a provident fund from March 1, 2018, unless their savings are R247 500 or less, in which case they can take the full amount as a lump sum.
* On retirement, they will be able to withdraw in full any contributions made up to March 1, 2018 and any growth on those savings before or after March 1, 2018.
* Provident fund members aged 55 or older on March 1, 2018 will not have to buy an annuity with their savings.
* If there is no agreement that members must annuitise their savings, the tax deductions these members received for contributions to their provident funds will no longer apply.
Provident fund members should remember that, as a result of increasing longevity, their retirement savings have to provide an income for longer. Although they can still withdraw all their savings as a lump sum, they should give much thought to how best they should invest it to provide an income stream.
TRANSFERS BETWEEN FUNDS
Pension fund members cannot transfer their savings to a provident fund. This was to become possible from March 1, but now it is likely that such transfers will become possible after March 1, 2018 only if provident fund members are obliged to buy an annuity at retirement.
NATIONAL TREASURY’S REASONS FOR THE CHANGES
National Treasury says uniform tax deductions for retirement funds and capping the deductions at R350 000 a year will make the tax system simpler, fairer and more progressive. As a result, the tax deductions for high earners will be limited, while low- and middle-income earners will be entitled to higher deductions.
The thinking is that, if the government gives you a tax incentive to save for retirement, you must use your savings to buy a pension, or annuitise.
Some of the arguments against annuitisation are that provident fund members should have the right to use their lump sums to buy businesses or farm land at retirement.
National Treasury’s figures show that many provident fund members will not have more than the threshold above which you are required to buy an annuity at retirement.
Another sticking point is that, if you are forced to annuitise, you may no longer qualify for the social old-age grant.
Cosatu is demanding the release of a comprehensive discussion paper on social security as a condition for retirement reform, but, as Treasury officials explained to Parliament last year, the issues are complex and work is still in progress
IMPACT OF POSTPONING ANNUITISATION
The Association for Savings & Investment SA (Asisa) says it is relieved that most of the retirement fund tax changes will go ahead.
Leon Campher, the chief executive officer of Asisa, says Asisa appreciates that the government “had little choice but to put forward a compromise”.
Campher says Asisa firmly believes that the annuitisation of retirement benefits is in the best interests of all South Africans.
Arno Loots, the head of umbrella fund solutions at Liberty Corporate, says Liberty will have to make changes to its administration systems, because they had been set to track post-March 1 provident fund savings separately from pre-March 1 provident fund savings.
He says Liberty has spent a lot of time and money communicating with employers, advisers and fund members about the changes that were due to take place on March 1 and will now have to communicate this week’s changes to them.
Richard Carter, the head of product development at Allan Gray, says this week’s changes will affect only members of Allan Gray’s provident preservation funds.
He says what is of concern about this week’s concession to Cosatu is that the tax changes and annuitisation were baby steps towards improving the preservation of retirement fund savings in the best interests of the country. Many South Africans retire on incomes well below what they were earning before they retired – on average, 30 percent, but even less for some people.