This year is set to be an important year for the South African retirement fund industry, following the announcement this week by the National Treasury that President Jacob Zuma has signed into law the 2015 Tax Administration Laws Amendment Act No 23 of 2015 and Taxation Laws Amendment Act No 25 of 2015.
This means that the first batch of the retirement reforms related to tax harmonisation of retirement funds is set to become a reality on March 1 – or T-day, as it has become known.
Following the announcement earlier this week, there have been some concerns raised around the retirement reforms, specifically relating to what these reforms would enforce and how members’ retirement savings would be impacted. To avoid panic, it is crucial that all industry stakeholders communicate effectively with members and allay misconceptions currently in the public domain about the impact of the changes. Retirement fund members need to be reassured that the changes to be made on T-day will not have any immediate impact on their ability to access their benefits. The requirement for members to annuitise their provident fund benefits will only take effect over time because existing savings made up to the end of next month are excluded from the changes and only savings over the de minimus of R247 500 will be impacted. In addition, these changes do not limit the ability of members to take their benefits as cash should they resign, be dismissed or be retrenched from their employer.
These changes include:
* Members of all approved funds (pension, provident and retirement annuity funds) will be afforded a contribution deduction of 27.5 percent of the greater taxable income or remuneration, subject to a yearly maximum of R350 000.
* Employer contributions to retirement funds will be taxable as fringe benefits, with these contributions being deemed to be employee contributions for the purposes of claiming the deduction.
* The rights of provident fund members to take retirement benefits in cash will be protected for all benefits that they have accumulated up until T-day plus the growth thereon until their retirement. This amount will not form part of these members’ “retirement interest” for the purposes of applying the annuitisation requirements (explanation below) that they will be subject to from T-day.
* The de minimus annuitisation amount will be increased from R75 000 to R247 500. This means that, from March 1, members who retire from approved retirement funds with “retirement interests” (that is for provident fund members, only their post T-day savings plus growth) in the fund of less than R247 500, may take their entire balance in the fund in cash and will not have to annuitise any amount.
Annuity
If their “retirement interest” in the fund at retirement is above this de minimus amount, the member can take one-third of their “retirement interest” in cash and the remaining two-thirds of the “retirement interest” will need to be used to purchase an annuity. For provident fund member savings, any pre T-day savings plus growth thereon may always be taken in cash.
The effects of these changes are generally positive for all retirement fund members, especially for provident fund members whose contributions will now be tax deductible. In most cases this will translate to increased take-home pay. However, in future members younger than 55 on March 1 and with more that R247 500 saved in a provident fund will not be able to withdraw the full amount as a cash lump sum in respect of the contributions made after March 1.
For those concerned about the impacts of the amendments, there are a few points to stress and/or elaborate on:
Firstly, all funds contributed prior to March 1 will not be affected by the new amendments – neither the accumulated capital nor growth thereof. There is therefore no need for members to panic as these funds will not be impacted at all. Only contributions from March 1 will be subject to the annuitisation rules, and only if the savings are R247 500 (referred to as the new de minimus amount).
Secondly, should a member resign, become disabled, be retrenched or be dismissed, these changes do not impact their retirement fund savings. The member will still be able to access their savings in the same way as currently, including the ability to take their benefit as a cash lump sum.
Thirdly, members aged 55 and over will not be affected at all by the annuitisation requirement, provided they remain on the same fund of which they were a member on T-Day until retirement.
Lastly, should retirement fund members be concerned about the impacts of these changes, there are other investment and savings vehicles to consider. Such options can be explored with an accredited financial advisor for contributions made after March 1.
While the T-day reforms have to limit the member’s access to cash at retirement, they have the potential to deliver benefits for fund members. Unlocking these benefits in full will require action by employers and their advisers, in consultation with employees.
Consultation
Members will need to be consulted on whether they want to leverage the reforms to save more towards their retirement. Doing this could be especially advantageous to those fund members who are behind on their retirement savings. However, some members may prefer to save additional amounts into other savings products that do not limit withdrawal, such as the tax-free savings plans.
There are a number of key actions that employers and advisers need to consider taking in the lead-up to T-day. These include adapting human resource and payroll systems to meet the new requirements as a result of the changes.
Careful assessment of the impacts of transfers for provident fund members who are older than 55 years as at March 1 also needs to be conducted.
Member communications also need to explain the upcoming changes, including the benefits of additional voluntary contributions and how to make these, and reinforce the message that members do not need to resign to protect their retirement savings or their rights as a fund member.
* Hugh Hacking is the head of Old Mutual Corporate Consultants.
** The views expressed here do not necessarily reflect those of Independent Media.
BUSINESS REPORT