Green light for next year’s retirement fund tax changes

A few million retirement fund members will benefit from the National Assembly’s decision this week not to amend the date (March 1 next year) of implementation in the Income Tax Act of changes that introduce uniform tax deductions for all retirement fund members and the need for provident fund members to buy a pension (annuity) at retirement.

The implementation of uniform tax deductions for all retirement fund members will, for most members, mean they will be able to make larger tax-deductible contributions. Provident fund members will enjoy a tax deduction for the first time, which will increase the take-home pay of many tax-paying members from March next year.

All retirement fund members, regardless of the fund they belong to, will be able to deduct 27.5 percent of the higher of their remuneration or taxable income, to a maximum deduction of R350 000 a year.

Although the implementation of the long-awaited tax law changes also means that provident fund members will have to buy an annuity with contributions made from March next year (and growth on these contributions), many of them are only likely to have enough savings to be required to buy an annuity after 11 years of saving. Many, especially on lower incomes, will never have to buy an annuity and any savings up to March next year and growth thereon can still be taken as a lump sum at retirement.

The amendment passed by the National Assembly this week, and expected to pass through the National Council of Provinces next week, means members will only be required to buy an annuity if their post- March 2016 savings exceed R247 500 at retirement. This threshold is expected to be adjusted for inflation from time to time, National Treasury indicated this week.

Whatever you have contributed to a provident fund before March 1 next year, will remain available to you to withdraw as a lump sum at retirement, and any provident fund member who is 55 years or older on March 1 next year will be able to withdraw all their savings as a lump sum on retirement, regardless of how much they contribute to the fund after March 1 next year.

Before the amendment was passed, Parliament’s standing committee on finance introduced a clause requiring a compulsory review in two years’ time of the legislation bringing about what has been dubbed “tax harmonisation and annuitisation”.

It also ordered Treasury to continue its discussions with labour unions, principally Cosatu, on the benefit of the new measures and their concerns, and to embark on a campaign to educate retirement fund members about the changes.

Cosatu has been demanding the release of a discussion document on a comprehensive review of social security rather than piecemeal retirement reform and has said that members’ misinterpretation of the tax law changes are driving them to resign and withdraw their savings.

National Treasury has told Parliament the resignations were largely among members of the Government Employees Pension Fund, and were triggered by high levels of indebtedness and statements showing members their withdrawal benefits for the first time. They are not affected by the requirement to buy a pension at retirement, because they already receive their retirement benefits as a defined pension.

Taking note of Cosatu’s concerns, Treasury has said it is committed to reforming the annuity market to ensure it is more appropriate for workers and funds provide better and cheaper annuities as defaults for retiring members.

In comments on the implementation of the legislation, the Federation of Unions of South Africa (Fedusa) supported the implementation of the tax changes from March next year, while the National Council of Trade Unions (Nactu) supported a phased implementation, but were not averse to the changes going ahead next year.

This week, Treasury presented the finance committee with calculations showing that most provident fund members will not be forced to buy an annuity at retirement for many years because they are contributing small amounts, so it will take many years from March 1 next year to exceed the threshold of R247 000 (see table, right).

Treasury says the length of time it will take for an employee’s retirement savings balance to exceed this threshold depends on:

◆ The amount you and your employer contribute;

◆ Your current salary, and growth in your salary between now and when you retire;

◆ Investment returns between now and when you retire; and

◆ How the threshold of R247 500 will increase due to inflation between now and when you retire.

Treasury used data from the South African Revenue Service on the distribution of earnings of provident fund members to estimate the length of time it will take workers to be affected by the annuitisation requirements.

Using conservative assumptions to determine the worst-case scenario, Treasury estimates that provident fund members earning more than R1.7 million a year may have saved enough to have reached the annuity threshold of R247 500 by 2017, but this will affect only one percent of all provident fund members.

Almost 50 percent of provident fund members who earn about R70 000 or less will not have enough savings to breach the threshold until 2026. Employees earning more than R235 000 a year on March 1 next year (around 12 percent of provident fund members) will reach the threshold in five years of the implementation date.

If the R247 500 threshold is increased broadly in line with inflation, the annuitisation requirement will take effect more slowly, and it will be 14 years before workers who have a pensionable salary of R77 500 will be affected, Treasury says.

Treasury’s data also shows that an employee earning a pensionable salary of R150 000 a year who contributes five percent and whose employer contributes 10 percent of his pensionable earnings to a provident fund will have a R113-a-month increase in his or her take-home pay as a result of the tax changes.

An employee earning a pensionable salary of R750 000 a year who contributes five percent and whose employer contributes 10 percent will receive a R1 281 a month increase.