Questions over silence on reforms

THE Budget speech was very light on matters affecting retirement fund investors, and did not reference retirement reforms at all.

Most significantly for retirement savers, the marginal tax rate for those earning above R1.5 million has been increased to 45%. This increases the tax benefit for high income earners on retirement fund contributions. The scope is limited, however, in view of the rand cap of R350 000, which limits the effective retirement fund deduction for such individuals to 23.3%.

Another consequence of this increase is that it pushes up the potential maximum effective tax rate on capital gains from 16.4% to 18%.

The dividend withholding tax increases substantially, from 15% to 20%. This, too, makes it more attractive to shield investment returns in a retirement fund vehicle, which is not subject to tax on investment returns.

The annual permitted contribution to the TFSA has been increased from R30 000 to R33 000. As far as we are aware, the lifetime stays at R500 000 but it does mean that this can now be reached around one year sooner (15 years instead of 16 years).

Impact on SA retirement savings:

Miscellaneous tax amendments proposed for the upcoming tax legislative cycle are set out below:

Preservation of benefits after reaching normal retirement dates: In 2014, the law was changed to permit individuals to retire without immediately drawing their retirement benefit (and paying tax thereon). It did not, however, permit the transfer of this benefit to another fund. It is now proposed that transfers of retirement interests be allowed from a retirement fund to a retirement annuity fund, subject to fund rules.

Tax-exempt status of preMarch 1998 build-up in public-sector funds: Currently, the Income Tax Act provides the tax-free portion relating to preMarch 1, 1998 service can be carried over on transfer from a public sector fund to a pension fund, but not on subsequent transfers. It is proposed that subsequent transfers of these lump sum benefits to another pension fund be tax free.

Removing time limit to join an employer umbrella fund: Existing employees who do not join a newly established employer umbrella fund have 12 months within which to join the fund, after which they are unable to join. To encourage retirement saving the Treasury proposes to scrap the 12-month limit, enabling employees to join without time restriction, subject to the rules of the fund.

This will be a welcome scrapping of a senseless rule.

Applying the R350 000 deduction cap across the year: It is not clear how this cap should be applied when determining monthly employees’ tax. It is proposed the amount of R350 000 should be spread evenly over the tax year.

Annuitisation for provident fund members. The Treasury hopes to push this through as planned, with effect from March 1, 2018. Discussions with Nedlac and others on this are ongoing. The Treasury will also engage with the industry to provide annuity products that better suit the needs of low- and middle-income members of retirement funds.

Automatic enrolment in retirement funds. The government is considering automatic enrolment to ensure more workers save for retirement. This would require employers to automatically enrol their workers into a retirement fund.

Veegh is CIO of 10X Investments. Visit www.10x. co.za for more information.