The first of March 2015 will usher in a number of radical changes in Retirement Fund legislation . . . .
As a result of the Taxation Laws Amendment Act 2013 a number of significant changes to the treatment of retirement contributions and benefits will come into force . In summary:
- Disability benefit premiums will not be tax deductible but benefits will be tax free – group arrangements included.
- Employer contributions to retirement funds ( pension ,provident, retirement annuity ) will be treated as fringe benefits in the hands of the employee . However employees may deduct up to 27,5 % of remuneration or taxable income in respect of all contributions to any retirement fund subject to an annual cap of R 350 000. Contributions in excess of this can be rolled forward and offset against future years’ allowances .
- Only one third of the retirement benefit from a provident fund will be able to be taken as a lump sum, the balance will have to be annuitized. However, benefits accrued before 1 March 2015 and subsequent interest on them will still be 100% encashable . In addition provident fund members who are 55 years or more of age on 1 March 2015 will also be able to encash 100% of benefits arising from contributions made after that date to the fund/s they belonged to at that date.
- The cash commutation limit will be raised from R 75 000 to R 150 000.
These changes mark the harmonization of the treatment of retirement fund contributions and benefits and have a number of practical consequences:
- Employers will need to amend payroll systems to take into account these changes.
- Employees 55 or over who are currently members of provident funds will need to take into account the impact of exiting such funds in future.
- Employers will have to bear in mind the impact on these members of closing provident funds.
- Provident funds that continue past 1 March 2015 will have to amend their rules to become hybrids with pre and post 1 March 2015 benefits.
- Pension funds will need to amend their rules to reflect the new contribution limits.
In light of the increased tax deduction on contributions , employers might consider increasing contributions or even restructuring their schemes to only have employer contributions . The contribution deductions apply to ALL contributions made to a fund and the new standardisation for tax deductions is simpler as employers can treat all contributions to pension , provident and retirement annuity funds as a deductible employment expense and a fringe benefit for employees .
The Taxation Laws Amendment Bill 2014 recently submitted to the Parliamentary Standing Committee on Finance proposes to amend the Taxation Laws Amendment Act 2014 in another significant way as regards retirement fund benefits. It is proposed that with effect from 1 March 2015, retirement fund members may elect to defer taking their pension until after the retirement date set by their fund. While Normal Retirement Date will continue to reflect the date at which an employee ceases to be employed by the employer, it will no longer mean the date at which the member takes their pension. As their financial circumstances allow, members will be able to leave their benefits in their fund or transfer it to another retirement funding vehicle.
This change is consistent with the progressive increase in life expectancy of fund members; at age 65 this is about 20 years . As life expectancy ratchets up, adequate retirement income provision may become generally unrealistic for the typical 40 year working life mandated by increased access to higher education and the improbability of a general increase in the retirement age (in a society with massive structural unemployment ). Whether members cannot afford to retire or simply don’t want to , the impact of deferring taking ones pension is considerable . The following Table gives an indication of the kind of difference taking your pension later can make for a joint life annuity ( spouse 5 years younger than member ) with no guarantee :
|Start Age||Value index-nominal*||Value index-real**|
* 9% per annum growth in purchase consideration – c.CPI + 3
** 3% per annum growth in purchase consideration.
The gains from deferment are predominantly from the additional time that funds are invested and not from reduced life expectancy .
This change is clearly an important factor in retirement planning .Where life stage benefits are offered, for example, it may be inappropriate to move to low equity exposure prematurely if one plans to defer taking one’s pension.
From a practical perspective National Treasury have indicated that you are expected to choose how much of your retirement savings you want to take as a lump sum .Your fund must apply for a tax directive from SARS to determine how much tax to withhold from your lump sum.
Careful attention will have to be given to amending fund rules, for example:
- Will members be able to make contributions to the fund?
- How will risk benefits be treated?
- The fund will have to make provision for administration fees .
- How will growth on ‘deferred‘ benefits be determined?
These are among the numerous issues to be addressed if the Bill is enacted.
Are you ready for the Kalends of March ?