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Will your pension fund let you boost what you save?

Retirement

Since March 1 this year, you, as a salaried employee and member of an occupational retirement fund, have been able to contribute a higher portion of your income to your retirement fund and deduct it from tax. Your fund should, by now, have made you aware of this and may have amended its rules to accommodate the higher contributions. If not, you may have to approach the fund or your human resources department for clarity on the matter.

The March 1 change forms part of the government’s broader intended retirement reforms aimed at harmonising the taxation of provident and pension fund contributions and encouraging you to preserve your savings until you retire.

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Until the 2015/16 tax year, the following tax-deductibility limits applied to your contributions as an employee:

• Pension funds: not more than the higher of R1 750 or 7.5 percent a year of your pensionable salary;

• Retirement annuity (RA) funds: up to 15 percent of non-retirement-funding income (income on top of that on which your pension contributions were based, such as bonuses and allowances); and

• Provident funds: you could not claim a tax deduction on your contributions.

Since March 1, when the 2016/17 tax year began, you should have seen major changes to your salary slip, including the addition of your employer’s retirement fund contribution to your remuneration. The new tax-deduction rate applies to the total of your and your employer’s contributions.

Note that the rate applies to your cumulative retirement fund contributions, which include what you save not only in your occupational pension or provident fund, but also, perhaps, in a retail RA fund. The rate is 27.5 percent of the higher of your remuneration or your taxable income, subject to a limit of R350 000 a year.

HAVE YOU BEEN TOLD?

So has your provident or pension fund informed you of these changes, and made the necessary amendments to its rules to allow you to contribute more if you want to? To claim a tax deduction for additional voluntary contributions for the current tax year, you have until the end of February 2017 to make the additional contributions.

The head of pensions (licensing and registration) at the Financial Services Board (FSB), Fikile Mosoma, says funds’ boards have a duty to communicate legislative changes to their members and ultimately to decide whether or not to amend their rules (for the benefit of members).

She says contribution limits contained in funds’ rules reflect what has been agreed by boards and members. If you want to increase your contributions to your occupational fund to the 27.5-percent maximum, but the fund’s rules do not allow this, you must abide by the fund’s rules. You need to wait until the rules have been amended before being able to contribute at a higher rate. The Registrar of Pension Funds must approve rule amendments.

Many funds allowed members to make additional voluntary contributions before the March 1 changes, Tashia Jithoo, a legal expert in pensions and financial regulation at Bowman Gilfillan Africa Group, says. However, she says the changes to the tax laws that provided for the increased tax deduction on contributions did not expressly state that funds had to make provision for higher contributions.

“We are not aware of many funds that have already made applications for rule amendments to allow additional voluntary contributions, but this does not mean that funds are not considering the issue and taking steps to amend their rules where they think this necessary,” she says.

Funds should submit rule amendments to the FSB in good time if they want their members to be able to take the opportunity of increasing their annual contribution before the end of the current tax year, Jithoo says.

Although the official turnaround time for new rules or rule amendments is 30 days, she says some funds have experienced delays in getting amendments registered for a variety of reasons, so these turnaround times could be longer. “Funds need to bear this in mind when determining whether or when to amend their rules. Communicating the rule amendments to members would also take time, so this also needs to be factored into any timelines,” Jithoo says.

APPROACH YOUR FUND

If you want to boost your contributions to your occupational fund and the fund’s rules do not permit this, Jithoo advises you to ask your fund if it intends amending the rules, and if so, by when it expects this might be done. She says that typically you would dothis directly with the fund’s principal officer or a member-elected trustee, or through your employer or trade union.

“The issue of whether a fund can be compelled legally, by the Pension Funds Adjudicator or the courts, to amend its rules to allow for additional voluntary contributions has not been tested yet,” Jithoo says.

She says that, until the changes to the tax-deduction rates, some funds might have held the view that:

• It would not necessarily have affected provident fund members from a tax perspective if additional voluntary contributions were not allowed, because only employer contributions were tax-deductible in provident funds; and

• It may not have mattered if additional voluntary contributions were allowed in pension funds, because the tax deduction permitted was very limited.

The advantage of funds allowing additional voluntary contributions is that members have the option to use their entire tax deduction in one fund instead of having to split contributions among different types of funds, such as an occupational fund and an RA fund, Jithoo says.

An advantage of saving in an occupational fund rather than a retail RA fund is that the investment costs may be lower, because asset managers typically charge lower rates for institutional investors.

However, if your occupational fund does not permit a higher contribution, the RA route is an option.

“A risk for pension and provident funds is that, if they are perceived to be too slow in amending the rules to provide for additional voluntary contributions, members may decide to rather invest their ‘extra’ funds in an RA fund. This would reduce the potential contribution flow to pension and provident funds. The fact that the tax deduction has been restructured may cause funds to consider permitting additional voluntary contributions,” Jithoo says.

Regarding RA funds, if you have a contractual life assurance RA and want to increase your contributions, you will probably have to lock in at a higher rate, meaning you won’t be able to reduce contributions later without incurring a penalty.

On the other hand, the other type of RA, a unit trust RA, allows you to increase, decrease or stop your contributions without penalty.

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