Retirement re­forms ex­plained

Na­tional Trea­sury plans to get South Africans to save enough for retirement, which will lead to more changes to pen­sion and prov­i­dent funds in March 2016.

Finweek English Edition - - IN DEPTH RETIREMENT - Ed­i­to­rial@fin­week.co.za By Buhle Nd­weni

about 5% of South Africans save enough to be able to re­tire ad­e­quately, ac­cord­ing to Brian Butchart, MD at Bren­thurst Wealth. Hence pen­sion­ers of­ten run out of retirement sav­ings pre­ma­turely and be­come de­pen­dent on rel­a­tives or gov­ern­ment grants. To curb this, Na­tional Trea­sury pro­posed re­forms aimed at en­cour­ag­ing sav­ing to­wards retirement.

Trea­sury’s amend­ments mean that, by de­fault, your retirement sav­ings will be pre­served when you change jobs and your ben­e­fit will be con­verted to an an­nu­ity when you re­tire, rather than the cur­rent sit­u­a­tion where your money gets paid out as cash by de­fault, ex­plains Hugh Hack­ing, head of Old Mu­tual Cor­po­rate Con­sul­ta­tions.

Prov­i­dent fund mem­bers who re­sign from their jobs will how­ever still be able to take all their retirement sav­ings as a cash lump sum upon res­ig­na­tion, with tax im­pli­ca­tions. Al­ter­na­tively they can pre­serve their money with a financial in­sti­tu­tion, or pre­vi­ous or new em­ployer – with­out tax im­pli­ca­tions, to mo­ti­vate peo­ple to save.

How­ever, at retirement, prov­i­dent fund mem­bers will also be re­quired to con­vert at least two-thirds of their retirement sav­ings into an an­nu­ity or pen­sion, in­stead of re­ceiv­ing a large one-off sum of cash.

Tax im­pli­ca­tions

Start­ing from March 2016, Trea­sury will har­monise tax treat­ments of retirement fund con­tri­bu­tions in prov­i­dent, pen­sion and retirement an­nu­ity funds.

Tax de­duc­tion ben­e­fits will be ex­tended to prov­i­dent fund mem­bers as well, but the tax-de­ductible con­tri­bu­tion will be capped or lim­ited to 27.5% of the tax­able in­come or R350 000 per an­num for high-in­come earn­ers. All growth, in­ter­est and div­i­dends earned in either the pen­sion, prov­i­dent or retirement an­nu­ity is tax free, says Butchart.

Trea­sury also pro­posed that pen­sion and prov­i­dent funds have a preser­va­tion fund to pre­serve their ben­e­fits when re­sign­ing from a job. There is cur­rently no preser­va­tion fund pol­icy. There is also no ef­fec­tive date of im­ple­ment­ing such a pol­icy. Retirement an­nu­ity funds have a preser­va­tion fund where one can­not with­draw funds un­til at least the age of 55.

What hap­pens if your com­pany does not have a com­pul­sory retirement fund?

A retirement an­nu­ity (RA) is a good op­tion, says financial ad­viser at Bren­thurst Wealth, Re­nee Ea­gar. “An RA is such a good tax­ef­fi­cient ve­hi­cle. When you con­trib­ute to an RA you get a tax re­duc­tion, there is no cap­i­tal gains tax [and] no retirement fund tax within an RA. So what this means is your money is grow­ing at a real re­turn with­out hav­ing to take tax­a­tion into con­sid­er­a­tion.”

Re­nee Ea­gar Financial ad­viser at Bren­thurst Wealth

Brian Butchart MD at Bren­thurst Wealth

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