Pension delay for provident funds may cost members in tax

In its efforts to implement taxation parity across retirement funds, among other things, the government has made some concessions to the labour unions, writes Laura du Preez.

National Treasury tabled the Tax Laws Amendment Bill in Parliament this week with a proposal that provident fund members receive an increased tax deduction together with all other retirement fund members from March 1 next year, without these members being obliged to buy a pension (annuity) at retirement with contributions made next year.

However, the sting in the tail is that if these members, as represented by major labour federations, still do not agree to buying a pension with their retirement savings from March 1, 2017, their tax deduction will be reduced from 27.5 percent to 10 percent of the greater of their remuneration or taxable income.

Treasury says this means that more than a million provident fund members will receive an increased tax deduction next year, but if members do not agree to buy pensions with their retirement savings, some members whose employers contribute more than 11.1 percent of remuneration or taxable income will see a decrease in net pay from March 2017. This will be a result of employer contributions becoming a taxable fringe benefit, but may not apply if your retirement- funding income is lower than your remuneration or taxable income.

For pension and retirement annuity fund members, the fringe benefit will be offset by the increased tax deduction, but if the deduction is limited from 2017 for provident fund members, it will have an impact on the takehome pay of higher earners with higher employer contributions.

According to Treasury, tax statistics show there are 1.25 million provident fund members who make their own contributions to provident funds and earn above the tax threshold who could potentially enjoy a tax deduction on their contributions (see the table on how the deduction will affect you as a member of a provident fund – with this article on our www.persfin. co.za).

The tax bill also contains a proposal to increase from R75 000 to R250 000 the minimum amount you need at retirement before you, as a member of any retirement fund, are compelled to buy an annuity with two-thirds of your savings.

This minimum amount is known as the de minimus threshold. Raising this threshold means that more provident fund members will escape the effects of what is known as annuitisation.

The increase in the de minimus threshold and the delayed implementation of annuitisation for provident fund members are attempts to win over the labour constituency at Nedlac.

An alternative proposal by Treasury in the latest version of the bill is to delay the obligation to buy a pension at retirement for provident fund members for a year or more, but with the tax deduction decreasing from 2017.

The new higher tax deduction

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at for all retirement fund members comes together with a R350 000-ayear limit on tax deductible contributions to a fund. In terms of Treasury’s proposal, if provident fund members still do not agree to annuitisation from 2017, together with the reduced tax deduction they will face a reduced limit of R125 000 for taxdeductible contributions.

The limit on the tax deductions are intended to introduce greater parity by denying high-income earners large tax-free fringe benefits (see “Government closes retirement-savings tax loopholes used by wealthy”, above).

There will also be a minimum R30 000 that is tax- deductible regardless of the percentage limit. This is to ensure that lowerincome earners are not adversely affected by the tax changes.

The legislation provides for provident fund members’ vested rights to be protected. This means that members will still, at retirement, be able to withdraw any contributions made to a provi- dent fund (and the growth on these contributions) before the date on which it is agreed that annuitisation will be adopted.

In addition, members who are 55 years or older when annuitisation is adopted will not be obliged to buy an annuity at retirement.

Although the tax amendments introducing a uniform deduction for all retirement fund contributions was passed by Parliament in 2013, it was not implemented as originally intended in 2015 after the unions objected to the change as piecemeal reform.

The labour unions are demanding that the implementation of the tax amendment be delayed until there is a comprehensive social security reform paper, but in a statement this week Treasury says that while the government is committed to the release of the paper, producing it has taken longer than anticipated.

John Anderson, the head of research and development at Alexander Forbes, says that the reduction in some members’ take- home pay from 2017 could create confusion and distrust of retirement funds as savings vehicles.

He says administrators such as Alexander Forbes will have to develop new systems to deal with the reduced tax deduction in 2017 if it is implemented.

Anderson says “it is a pity that no agreement has been reached to date between government and labour”, because with the new higher de minimus amount, the vast majority of provident fund members will be either better off or unaffected if the 27.5 percentof- income tax deduction and annuitisation are adopted from March next year.

Freeing up income through increased tax deductibility introduces greater opportunity and scope for members to save towards retirement, Anderson says.

Treasury has called for comment on the timing of the implementation of the legislation introducing uniform tax and annuitisation – comments can be submitted until Monday.