How new pen­sion tax regime works

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MARCH 1 marked what has be­come known as T-day the day the long-awaited tax re­forms be­came a re­al­ity in the re­tire­ment in­dus­try and for re­tire­ment fund mem­bers.

Es­sen­tially, the amend­ments will fa­cil­i­tate bet­ter tax align­ment across pen­sion, prov­i­dent or re­tire­ment an­nu­ity funds. How­ever, Romeo Msipha, se­nior con­sul­tant at Old Mu­tual Cor­po­rate Con­sul­tants, says there has been some un­cer­tainty among re­tire­ment fund mem­bers about ex­actly how their re­tire­ment sav­ings will be af­fected by th­ese new rules.

Ini­tially the amend­ments were go­ing to in­tro­duce tax har­mon­i­sa­tion and the an­nuiti­sa­tion of re­tire­ment funds over a spe­cific amount.

How­ever, it was an­nounced in the 2016 Bud­get Speech that the Rev­enue Laws Amend­ment Bill 2016 will give ef­fect to the de­ci­sion by the govern­ment to post­pone the an­nuiti­sa­tion re­quire­ment for prov­i­dent and prov­i­dent preser­va­tion fund mem­bers by two years.

Msipha says the changes have caused some con­fu­sion and stresses it is im­por­tant to un­der­stand if and how they will be af­fected.

He un­packs the key el­e­ments of the new rules:

What rules are ef­fec­tive as of March 1 2016? Pen­sion, prov­i­dent or re­tire­ment an­nu­ity funds pre­vi­ously had dif­fer­ent tax de­duc­tion al­lowances. As of March 1 2016, mem­bers of all ap­proved funds (pen­sion, prov­i­dent and re­tire­ment an­nu­ity funds) qual­ify for a con­tri­bu­tion de­duc­tion of 27.5% of the greater of their tax­able in­come or the to­tal re­mu­ner­a­tion. A mem­ber can con­trib­ute the to­tal amount into a sin­gle fund or a com­bi­na­tion of funds (e.g. some into a prov­i­dent fund and the rest into a re­tire­ment an­nu­ity fund).

This tax de­duc­tion is now capped at R350 000 per year, which means only a per­son with tax­able in­come or re­mu­ner­a­tion ex­ceed­ing R1 272 727 per year will reach this max­i­mum. Con­tri­bu­tions not claimed for the year can be rolled over and claimed in the next year.

For pen­sion, pen­sion preser­va­tion and re­tire­ment an­nu­ity fund mem­bers, the amount of money al­lowed to be taken as cash at re­tire­ment (known as the de min­imis for an­nuiti­sa­tion has in­creased from R75 000 to R247 500.

This means that if a mem­ber’s sav­ings in the pen­sion fund at re­tire­ment is R247 500 or less, the mem­ber can take the en­tire re­tire­ment ben­e­fit in cash. How­ever, if their re­tire­ment in­ter­est in the fund at re­tire­ment is for ex­am­ple R270 000, then the mem­ber must use two thirds (R180 000) to pur­chase an an­nu­ity and may only ac­cess the bal­ance (R90 000) in cash.

This an­nu­ity rule is not new for pen­sion, pen­sion preser­va­tion and re­tire­ment an­nu­ity fund mem­bers as they were al­ready re­quired to pur­chase an an­nu­ity at re­tire­ment age, pro­vided their sav­ings were above the de min­imis’ amount.

The an­nuiti­sa­tion rules for prov­i­dent and prov­i­dent preser­va­tion fund mem­bers has been post­poned to March 2018 but what does this mean?

An­nuiti­sa­tion refers to pur­chas­ing a pen­sion (known as an an­nu­ity) at re­tire­ment with two-thirds of re­tire­ment sav­ings, pro­vided the sav­ings are above the de min­imis” amount.

An an­nu­ity is in­tended to se­cure a reg­u­lar in­come for the fund mem­ber af­ter re­tire­ment for the rest of his or her life. There are var­i­ous op­tions avail­able and mem­bers are able to choose the type of an­nu­ity and the provider when they re­tire (de­pend­ing on the rules of the fund to which they be­long).

Be­fore the in­tro­duc­tion of the tax law amend­ments, mem­bers of pen­sion, pen­sion preser­va­tion and re­tire­ment an­nu­ity funds were al­ready re­quired to re­ceive two-thirds of their re­tire­ment sav­ings at re­tire­ment in the form of an­nu­ity pay­ments.

The orig­i­nal an­nuiti­sa­tion re­quire­ment com­po­nent of th­ese re­forms would have re­quired cer­tain prov­i­dent and prov­i­dent preser­va­tion fund mem­bers, de­pend­ing on their re­tire­ment sav­ings amount and other fac­tors, to also have to pur­chase a pen­sion (an­nu­ity) at re­tire­ment. This has how­ever been post­poned to March 2018.

What are the changes that took place on March 1?

The tax law amend­ments will im­pact in­di­vid­u­als dif­fer­ently, de­pend­ing on their per­sonal sit­u­a­tion and cir­cum­stances. The im­me­di­ate im­pact can af­fect mem­bers in one of the fol­low­ing ways:

Mem­bers con­tribut­ing more than R350 000 per an­num will pay more tax.

Prov­i­dent fund mem­bers con­tribut­ing less than R350 000 will, for the first time, en­joy tax de­ductibil­ity on their own con­tri­bu­tions from March 1 2016, which means that their take­home pay could rise.

The level above which pen­sion fund and re­tire­ment an­nu­ity fund mem­bers are re­quired to use at least two-thirds of their ben­e­fit to pur­chase an an­nu­ity (known as the de min­imis’ amount) has in­creased from R75 000 to R247 500.

What is the dif­fer­ence be­tween how my re­tire­ment ben­e­fits are treated be­fore and af­ter March 1? 1) Pen­sion fund mem­bers:

Tax de­ductibil­ity of mem­ber con­tri­bu­tions is up from 7.5% of pen­sion­able earn­ings for pen­sion fund mem­bers, to 27.5% of the greater of their tax­able in­come or the to­tal re­mu­ner­a­tion re­ceived from their em­ployer. This is sub­ject to a yearly max­i­mum of R350 000.

Pen­sion fund mem­bers are al­ready re­quired to re­ceive two-thirds of their re­tire­ment sav­ings at re­tire­ment in the form of an­nu­ity pay­ments and this does not change.

The only thing that has changed is the an­nuiti­sa­tion thresh­old below which an­nuiti­sa­tion is not re­quired. This is known as the de min­imis for an­nuiti­sa­tion’ and it has in­creased from R75 000 to R247 500. There­fore, if mem­bers have less than R247 500 in re­tire­ment sav­ings when they re­tire they can take the whole amount in cash. 2) Prov­i­dent fund mem­bers:

Be­fore March 1, mem­ber con­tri­bu­tions were not tax de­ductible (how­ever em­ploy­ers could deduct em­ployer con­tri­bu­tions from the em­ployer tax).

Now, prov­i­dent fund mem­ber con­tri­bu­tions are tax de­ductible and a mem­ber can con­trib­ute up to 27.5% of their tax­able in­come or to­tal re­mu­ner­a­tion from their em­ployer (whichever is the greater), sub­ject to a yearly max­i­mum of R350 000. 3) Re­tire­ment an­nu­ity (RA) fund mem­bers:

Pre­vi­ously there was a tax de­ductibil­ity of 15% of non-pen­sion­able earn­ings for re­tire­ment an­nu­ity fund mem­bers. A mem­ber may now con­trib­ute 27.5% of the greater of tax­able in­come or the to­tal earn­ings from their em­ployer into their pen­sion, prov­i­dent and RA funds. This is sub­ject to a yearly max­i­mum of R350 000.

Msipha urges mem­bers to learn how the new tax law amend­ments im­pact their own re­tire­ment sav­ings and how they can max­imise their sav­ings for a more fi­nan­cially se­cure fu­ture. In­creas­ing con­tri­bu­tions to their re­tire­ment fund is one ex­am­ple.

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