Get­ting in line with re­al­ity

Con­fu­sion over the fu­ture of pen­sion and prov­i­dent funds re­mains. The bud­get did not make that any eas­ier to un­der­stand

Financial Mail - Investors Monthly - - Budget 2017 - Stephen Cranston cranstons@fm.co.za

With per­sonal taxes up and an in­crease in div­i­dend with­hold­ing tax from 15% to 20%, the tax breaks from re­tire­ment funds con­tinue to get more valu­able.

There is still con­fu­sion about the fu­ture of pen­sion and prov­i­dent funds, and the bud­get did not make that eas­ier to un­der­stand. There is a stale­mate over plans to force prov­i­dent fund mem­bers to take pen­sions in­stead of lump sums at re­tire­ment. Trea­sury had planned to in­tro­duce this in the 2016 fi­nan­cial year, but the bud­get doc­u­ment says noth­ing will be in­tro­duced un­til there is con­sen­sus at the Na­tional Eco­nomic De­vel­op­ment & Labour Coun­cil.

Arno Loots, head of Lib­erty’s um­brella funds unit, says that the only stick trea­sury has de­ployed is to in­di­cate that prov­i­dent fund con­tri­bu­tions will lose their re­cently gained tax-free sta­tus un­less the par­ties agree to ac­cept forced pen­sions (or com­pul­sory an­nuiti­sa­tion).

Loots says that an in­ter­est­ing sug­ges­tion in the bud­get doc­u­ments is that trea­sury and the re­tire­ment in­dus­try should look at developing a new kind of an­nu­ity prod­uct for the lower- and mid­dle-in­come mar­ket, given that tra­di­tional pen­sions are un­pop­u­lar in these mar­kets.

The cur­rent top­i­cal dis­cus­sion in the pen­sions world is the de­fault reg­u­la­tions, which were pub­lished in De­cem­ber 2016 and for which in­dus­try com­ment is due by next week. These set out what will be per­mit­ted for re­tire­ment fund mem­bers who do not want to choose. In the first draft, per­for­mance fees and smooth bonus funds were not per­mit­ted; in the sec­ond draft they were al­lowed.

“My heart skipped a beat when I read that con­cerns on these top­ics might be re­viewed in the fi­nal pa­per,” says Malusi Ndlovu, head of Old Mu­tual Cor­po­rate Con­sul­tants. Ndlovu has a vested in­ter­est in sup­port­ing the highly prof­itable smooth bonus funds that Old Mu­tual uses as its main de­fault. But many of these prod­ucts are un­likely to get over the tight cost ceil­ing trea­sury is likely to im­ple­ment.

Reg­u­la­tions will soon be in line with re­al­ity, as par­lia­ment is fi­nally ex­pected to recog­nise the sta­tus of um­brella funds of­fi­cially. When the Pen­sion Funds Act was writ­ten in 1956, um­brel­las — which al­low for mul­ti­ple em­ploy­ers and are usu­ally of­fered by life of­fices — had not been in­vented. And trea­sury is cer­tainly am­bi­tious as it hopes to solve the prob­lem of the bil­lions in un­claimed ben­e­fits sit­ting in re­tire­ment funds.

Arno Loots, head of Lib­erty’s um­brella funds unit

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