Retirement fund members need to understand how the new amendments to the tax laws affect their retirement savings and how they can maximise their savings for a more financially secure future, Romeo Msipha, a senior consultant of Old Mutual Corporate Consultants, says.
He says increasing your retirement fund contributions is one example.
Below are some common questions about the change in the tax regime for retirement fund contributions and benefits that came into effect on March 1 this year, known as T-day.
Q: What deduction changes became effective on March 1?
A: Pension, provident and retirement annuity (RA) funds previously had different tax deduction allowances. As of March 1, members of all approved contributory funds (pension, provident and RA funds) qualify for a contribution deduction of 27.5 percent of the greater of their taxable income or the total remuneration that receive from employment.
A member can contribute the total amount into a single fund or a combination of funds (for example, some of the money into a provident fund and the rest into an RA fund).
The deduction is capped at R350 000 a year, which means that only someone with an annual taxable income or remuneration of more than R1 272 727 will reach this maximum, if they take advantage of the full 27.5-percent deduction afforded to them. Contributions not allowed as a deduction for the year can be rolled over and claimed in the following tax year.
Q: What can I now take as a lump sum on retirement?
A: For pension, pension preservation and RA fund members, the general rule is that you may take one-third of your retirement benefit in cash and you must use the remaining two-thirds to purchase an annuity (a product that buys you a monthly pension). The exception to the rule is that if your total benefit is less than a certain amount, known as the “de minimis for annuitisation”, you may take the full retirement benefit in cash. This de minimis amount was increased from R75 000 to R247 500 with effect from March 1 this year.
This means that if the amount in your pension fund at retirement is R247 500 or less, you can take the entire benefit in cash. However, if your saved amount is, for example, R270 000, you must use two-thirds (R180 000) to buy an annuity and may take only the balance (R90 000) in cash. This annuitisation rule is not new for pension, pension preservation and retirement annuity fund members, because they were already required to purchase an annuity at retirement age, provided their savings were above the de minimis amount.
Q: Annuitisation for provident and provident preservation fund members has been postponed to March 2018, but what does this mean?
A: Annuitisation refers to buying a pension (known as an annuity) at retirement with two-thirds of retirement savings, provided the savings are above the de minimis amount.
An annuity is intended to secure a regular income for you in retirement for the rest of your life. There are various options available, and you can choose the type of annuity and the provider when you retire (depending on the rules of your fund).
Members of pension, pension preservation and RA funds are already required to use two-thirds of their retirement savings at retirement to buy an annuity. The original annuitisation component of the tax reforms would have required certain provident and provident preservation fund members, depending on their retirement savings amount and other factors, also to purchase an annuity at retirement. This, however, has been postponed to March 2018.
Q: How will the changes that took place on March 1 affect me?
A: The tax amendments will impact people differently, depending on their personal situations and circumstances and the amounts contributed by their employers. This could affect you in the following ways:
* Before March 1, the amount that the employers of members of pension and provident funds contributed to these funds had no tax impact on these members. With effect from March 1, all employer contributions to these funds attract fringe benefit tax in the hands of these members. But you should not be unduly concerned, because this will have no impact on most members. This is because the employer contribution is deemed to have been made by you for the purposes of claiming their tax deduction for retirement fund contributions, and for the vast majority of members, the fringe benefit inclusion will be more than offset by the increased deduction available to them.
* Members contributing more than R350 000 a year will pay more tax.
* Provident fund members contributing less than R350 000 will, for the first time, enjoy tax deductibility on their contributions, which means that their take-home pay could rise.
* The level above which pension fund, pension preservation fund and RA fund members are required to use at least two-thirds of their savings to purchase an annuity (the de minimis amount) has increased from R75 000 to R247 500.
Q: What is the difference between how my retirement benefits were treated before and after March 1?
A: If you are a
* Pension fund member:
- Tax deductibility of your contributions is up from 7.5 percent of pensionable earnings to 27.5 percent of the greater of your taxable income or your total remuneration received from employment. This is subject to a yearly maximum of R350 000.
- You are already required to use two-thirds of your savings at retirement to buy a pension in the form of annuity payments, and this does not change.
- The only thing that has changed is the annuitisation threshold below which annuitisation is not required. This de minimis for annuitisation has increased from R75 000 to R247 500. Therefore, if you have less than R247 500 in total retirement savings when you retire, you can take the whole amount in cash.
* Provident fund member:
Before March 1, member contributions were not tax deductible (however, employers could deduct employer contributions from their tax). Since March 1, provident fund member contributions are tax deductible, and you can contribute up 27.5 percent of your taxable income or total remuneration from employment (whichever is the greater), subject to a yearly maximum of R350 000.
* RA fund member:
Previously, there was a tax deductibility of 15 percent of non-pensionable earnings for RA fund members. You may now contribute 27.5 percent of the greater of your taxable income or total earnings from employment into your RA fund. This is subject to an annual maximum of R350 000.
Q: Can I as a pension or provident fund member get my savings in cash if I resign or if I am retrenched or dismissed prior to retirement?
A: Yes, you can still take your benefit in cash. There is no change.
Q: What can you take as cash on retirement if, apart from the savings in your employer-linked pension or provident fund, you have savings in other retirement funds, such as RAs?
A: The R247 500 de minimis amount applies to each fund separately if the funds are with different providers.
Q: Is the government nationalising my fund?
A: No. The fund trustees will still make decisions in the retirement fund. Employers will still be able to control the benefit structures of their employees. You will still either receive a pension from your fund or be able to choose the type of annuity and the provider when you retire (depending on the rules of the fund).
Q: Is the government forcing me to preserve my savings when I change jobs?
A: No. The new rules do not deal with preservation at all. There is no change. There is no reason to resign to retain your current rights.