In 2012 Treasury started a reform in the retirement industry and papers were drafted to improve private retirement. These reforms are due to take effect on 1 March 2016.
The Current Retirement System
Currently there are three basic forms of retirement funds in the South African system: Pension Funds, Provident Funds and Retirement Annuities. Employer contributions to pension and provident funds are currently a non-taxable fringe benefit, and are a deductible business expense up to certain limits for personal income tax purposes. There is however no current tax deduction for member contributions to provident funds.
Pension and retirement annuity fund members are required to annuitise a portion (usually two thirds, with one third still available as a lump sum) of their retirement fund saving or interest upon retirement. Thus, provident fund members usually receive their retirement benefit as a lump sum upon retirement. This often results in the benefit not being re-invested for retirement purposes.
The new reforms will limit the tax deduction per annum to 27.5% or R350 000 (whichever is lesser) of the greater of the taxable income or remuneration. The reforms are intended to:
- Allow provident members a tax deduction for their own contributions. This will result in an increase in net income from salaries.
- The higher tax deduction limits for contributions allow for better savings culture.
- Extend the requirement to purchase an annuity to provident fund members.
- Applies the same deduction across all retirement funds
- The new limits will apply on taxable income or remuneration and not on pensionable salary
- Vested rights are protected for provident fund members. Although the effective date is 1 March 2016, members will not need to annuitise immediately.
Taxation Laws Amendment Act 2013
- Same tax dispensation for all contributions into retirement funds (retirement annuities, pension funds and provident funds)
- Annuitisation of benefits from provident funds (vested rights protected)
- Threshold to purchase an annuity increased from R75 000 to R150 00)
- Tax free lump sum at retirement increased from R315 000 to R500 000 (2014)
Taxation Laws Amendment Bill 2015
The proposed amendments to the Taxation Laws Amendment Bill, 2015 revert back to the amendments for retirement funds contained in Taxation Laws Amendment Act with a higher threshold to purchase an annuity of R247 500
There is no forced preservation
From 1 March 2016 there will be forced annuitisation of provident funds. But:
- This will only apply to contributions made after 1 March 2016. All provident funds will therefore have two accounts-pre-1 March 2016, and all growth thereon, which stays under the old rules, and post 1 March 2016 money and growth thereon which falls under the new rules
- Anyone aged 55 on 1 March 2016 will not have to annuitise, as long as they stay in the same fund. If the member decides to transfer to another fund, they would be required to annuitise two-thirds of any future contributions to the new fund.
Source – National Treasury Paper November 2015