Retirement tax delay: the impact for you
If you were hoping to enjoy a higher tax deduction for contributions to your retirement fund next year, and/or if your fund was in the process of changing its rules to allow you to contribute more, forget about it – at least for another year.
This week, National Treasury released the revised draft Taxation Laws Amendment Bill in which it proposes that the changes to the Income Tax Act, due to come into effect in March next year, be implemented only in March 2016. The changes would have meant higher tax deductions for many retirement fund members
In a media statement released with the bill, Treasury says government has agreed to delay the date on which the tax changes take effect – known as T-Day – for a year to allow for further consultations at the National Economic Development and Labour Council (Nedlac) – the government, business and labour negotiating forum.
Treasury says the labour constituency at Nedlac requested that the implementation of these laws – enacted last year – be postponed until there have been further consultations between government and Nedlac on social security reform.
This is despite consultations with the unions before the amendments were proposed as well as public hearings on the amendments in Parliament.
In September, the Congress of South African Trade Unions threatened to take its members on strike if the tax reforms were implemented.
Treasury says that, should there be no agreement at Nedlac by July next year, the implementation date may be moved out another year – to March 1, 2017.
In Parliament this week, Ismail Momoniat, Treasury’s deputy director-general for tax and the financial sector, said the government was asking for the delay despite the fact that the changes would “bring more equity and extend the tax benefit, and do not change preservation”.
The changes that were due to take effect on March 1 next year included:
* Allowing provident fund members a tax deduction for contributions for the first time and making the tax deductions for provident and pension funds the same.
* Allowing deductions for retirement fund contributions to any type of fund of up to 27.5 percent of taxable income or remuneration, whichever is higher. This would have meant most pension fund members would have enjoyed a higher tax deduction, because current deductions (20 percent for an employer and 7.5 percent for an employee) are on pensionable income only. It would also have meant that members of retirement annuity funds received a substantial increase on the existing deductions of 15 percent of non-retirement funding income.
* Limiting the tax deductions to a rand amount of R350 000 a year, a move that was likely to affect only high earners with an income of more than R1.27 million a year depending on their contribution rate.
* Allowing tax-free transfers between provident and pension funds; and
* Compelling provident fund members to buy an annuity, or monthly pension, with two-thirds of any retirement contributions to, and the growth on these, in their funds after the tax amendments took effect. However, any amounts saved prior to the implementation date could still be taken as a lump sum, and there are also provisions exempting those over the age of 55 or with small amounts of savings (less than R150 000) from being compelled to buy an annuity. These measures were expected to have the effect of making retiring provident fund members buy an annuity with two-thirds of a portion of their savings only in seven or eight years’ time.
The changes due to take effect next year would not have stopped you from withdrawing all your savings on resignation from your job – that is, they would not have introduced compulsory preservation of your retirement savings.
Preservation of retirement savings is a longer term goal that Treasury is negotiating with labour and employers, but many people confused preservation on resignation from employment with the requirement to buy an annuity on retirement (known as “annuitisation”).
In August, false rumours about retirement fund members being forced to preserve their retirement savings and the government nationalising pension funds reached a peak, with many members reportedly resigning from their funds as a result of the misinformation. However, there is no clarity on the numbers involved and how many members resigned to access their retirement funds to pay off debt.
Rowan Burger, the head of alternative products at Momentum Employee Benefits, says the unions are trying to force the government to deal with workers’ needs for social security through the government grants, healthcare, unemployment benefits and a retirement funding solution for informal workers.
The delay in the implementation of the tax reforms is bad news for many retirement fund members, because improved tax deductibility and the ability to contribute more tax effectively will be delayed, Michael Prinsloo, the head of best practice, research and product development at Alexander Forbes, says.
This would have had a fairly wide effect, because any taxpayer who is a provident fund member with a member contribution would have been able to pay these with pre-tax earnings from March 1, reducing their taxable salary and thus increasing their take-home pay, he says.
Burger says the delay in the implementation of the tax changes is not good, because they were aimed at improving the current tax system while protecting provident fund members’ vested rights.
He says middle-income earners who are able to increase their contributions and hence their tax deductions, have the most to gain from the changes.
In addition, the current structure with pension and provident funds operating under different tax regimes has cost implications that will now continue for possibly another two years, Burger says.
Kobus Hanekom, the head of general consulting at Simeka Consultants and Actuaries, an affiliate of Sanlam Employee Benefits, says the changes are widely accepted as necessary and appropriate reforms that would assist funds in structuring better retirement outcomes for you.
The delay will also upset the retirement fund industry, because preparations for the tax changes were already well under way. Prinsloo says significant time and money has already been spent on communicating the changes to employers and members, on administration system development and on benefit design. This may have to be repeated or undone.
Burger agrees that many employers and funds will be irate. He says some funds have applied to the Financial Services Board for rule changes to their retirement funds and have printed brochures.
The delay may be welcomed by the few higher-income earners whose tax deductions would have been limited and by some employers and funds who were ill-prepared for the changes.
Tony Mercer, the executive director of retirement fund administrator NBC, says despite the considerable time and effort spent to prepare for the changes next year, the delay may on balance not necessarily be all bad news. It will allow more time to educate provident fund members on the need to balance the competing interests of providing for old age and working age security and to persuade them that these interests may not be mutually exclusive.
As a result of the delay transfers from pension to provident funds will continue to be taxed, which hampers Treasury’s aim to achieve consolidation among retirement funds.
In addition, the minimum amount below which pension fund and retirement annuity fund members will not have to buy an annuity will remain at R75 000 rather than increasing to R150 000.
Hanekom says it is unfortunate that harmonising the provident and pension fund tax measures has to coincide with the requirement that provident fund members buy an annuity on retirement.
He says provident fund members are concerned that the compulsory annuity may disqualify them from receiving the old age grant, despite the government’s announcement that it would increase the means-test threshold for the social grant as an interim step to eventually scrapping the means test altogether.