Green light for next year’s re­tire­ment fund tax changes

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - LAURA DU PREEZ

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.