Will your pen­sion fund let you boost what you save?

You can now put away more tax-free in a re­tire­ment fund, but has your fund told you that you can, and will its rules al­low you to do so? re­ports

Weekend Argus (Saturday Edition) - - LIFE -

Since March 1 this year, you, as a salaried em­ployee and mem­ber of an oc­cu­pa­tional re­tire­ment fund, have been able to con­trib­ute a higher por­tion of your in­come to your re­tire­ment fund and deduct it from tax. Your fund should, by now, have made you aware of this and may have amended its rules to ac­com­mo­date the higher con­tri­bu­tions. If not, you may have to ap­proach the fund or your hu­man re­sources depart­ment for clar­ity on the mat­ter.

The March 1 change forms part of the govern­ment’s broader in­tended re­tire­ment re­forms aimed at har­mon­is­ing the tax­a­tion of prov­i­dent and pen­sion fund con­tri­bu­tions and en­cour­ag­ing you to pre­serve your sav­ings un­til you re­tire.

Un­til the 2015/16 tax year, the fol­low­ing tax-de­ductibil­ity lim­its ap­plied to your con­tri­bu­tions as an em­ployee:

• Pen­sion funds: not more than the higher of R1 750 or 7.5 per­cent a year of your pen­sion­able salary;

• Re­tire­ment an­nu­ity (RA) funds: up to 15 per­cent of non- re­tire­ment-fund­ing in­come (in­come on top of that on which your pen­sion con­tri­bu­tions were based, such as bonuses and al­lowances); and

• Prov­i­dent funds: you could not claim a tax de­duc­tion on your con­tri­bu­tions.

Since March 1, when the 2016/17 tax year be­gan, you should have seen ma­jor changes to your salary slip, in­clud­ing the ad­di­tion of your em­ployer’s re­tire­ment fund con­tri­bu­tion to your re­mu­ner­a­tion. The new tax-de­duc­tion rate ap­plies to the to­tal of your and your em­ployer’s con­tri­bu­tions.

Note that the rate ap­plies to your cu­mu­la­tive re­tire­ment fund con­tri­bu­tions, which in­clude what you save not only in your oc­cu­pa­tional pen­sion or prov­i­dent fund, but also, per­haps, in a re­tail RA fund. The rate is 27.5 per­cent of the higher of your re­mu­ner­a­tion or your tax­able in­come, sub­ject to a limit of R350 000 a year.

HAVE YOU BEEN TOLD?

So has your prov­i­dent or pen­sion fund in­formed you of th­ese changes, and made the nec­es­sary amend­ments to its rules to al­low you to con­trib­ute more if you want to? To claim a tax de­duc­tion for ad­di­tional vol­un­tary con­tri­bu­tions for the cur­rent tax year, you have un­til the end of Fe­bru­ary 2017 to make the ad­di­tional con­tri­bu­tions.

The head of pen­sions (li­cens­ing and reg­is­tra­tion) at the Fi­nan­cial Ser­vices Board (FSB), Fik­ile Mo­soma, says funds’ boards have a duty to com­mu­ni­cate leg­isla­tive changes to their mem­bers and ul­ti­mately to de­cide whether or not to amend their rules (for the ben­e­fit of mem­bers).

She says con­tri­bu­tion lim­its con­tained in funds’ rules re­flect what has been agreed by boards and mem­bers. If you want to in­crease your con­tri­bu­tions to your oc­cu­pa­tional fund to the 27.5-per­cent max­i­mum, but the fund’s rules do not al­low this, you must abide by the fund’s rules. You need to wait un­til the rules have been amended be­fore be­ing able to con­trib­ute at a higher rate. The Regis­trar of Pen­sion Funds must ap­prove rule amend­ments.

Many funds al­lowed mem­bers to make ad­di­tional vol­un­tary con­tri­bu­tions be­fore the March 1 changes, Tashia Jithoo, a le­gal ex­pert in pen­sions and fi­nan­cial reg­u­la­tion at Bow­man Gil­fil­lan Africa Group, says. How­ever, she says the changes to the tax laws that pro­vided for the in­creased tax de­duc­tion on con­tri­bu­tions did not ex­pressly state that funds had to make pro­vi­sion for higher con­tri­bu­tions.

“We are not aware of many funds that have al­ready made ap­pli­ca­tions for rule amend­ments to al­low ad­di­tional vol­un­tary con­tri­bu­tions, but this does not mean that funds are not con­sid­er­ing the is­sue and tak­ing steps to amend their rules where they think this nec­es­sary,” she says.

Funds should sub­mit rule amend­ments to the FSB in good time if they want their mem­bers to be able to take the op­por­tu­nity of in­creas­ing their an­nual con­tri­bu­tion be­fore the end of the cur­rent tax year, Jithoo says.

Although the of­fi­cial turn­around time for new rules or rule amend­ments is 30 days, she says some funds have ex­pe­ri­enced de­lays in get­ting amend­ments reg­is­tered for a va­ri­ety of rea­sons, so th­ese turn­around times could be longer. “Funds need to bear this in mind when de­ter­min­ing whether or when to amend their rules. Com­mu­ni­cat­ing the rule amend­ments to mem­bers would also take time, so this also needs to be fac­tored into any time­lines,” Jithoo says.

AP­PROACH YOUR FUND

If you want to boost your con­tri­bu­tions to your oc­cu­pa­tional fund and the fund’s rules do not per­mit this, Jithoo ad­vises you to ask your fund if it in­tends amend­ing the rules, and if so, by when it ex­pects this might be done. She says that typ­i­cally you would do this di­rectly with the fund’s prin­ci­pal of­fi­cer or a mem­ber-elected trustee, or through your em­ployer or trade union.

“The is­sue of whether a fund can be com­pelled legally, by the Pen­sion Funds Ad­ju­di­ca­tor or the courts, to amend its rules to al­low for ad­di­tional vol­un­tary con­tri­bu­tions has not been tested yet,” Jithoo says.

She says that, un­til the changes to the tax-de­duc­tion rates, some funds might have held the view that:

• It would not nec­es­sar­ily have af­fected prov­i­dent fund mem­bers from a tax per­spec­tive if ad­di­tional vol­un­tary con­tri­bu­tions were not al­lowed, be­cause only em­ployer con­tri­bu­tions were tax-de­ductible in prov­i­dent funds; and

• It may not have mat­tered if ad­di­tional vol­un­tary con­tri­bu­tions were al­lowed in pen­sion funds, be­cause the tax de­duc­tion per­mit­ted was very lim­ited.

The ad­van­tage of funds al­low­ing ad­di­tional vol­un­tary con­tri­bu­tions is that mem­bers have the op­tion to use their en­tire tax de­duc­tion in one fund in­stead of hav­ing to split con­tri­bu­tions among dif­fer­ent types of funds, such as an oc­cu­pa­tional fund and an RA fund, Jithoo says.

An ad­van­tage of sav­ing in an oc­cu­pa­tional fund rather than a re­tail RA fund is that the in­vest­ment costs may be lower, be­cause as­set man­agers typ­i­cally charge lower rates for in­sti­tu­tional in­vestors.

How­ever, if your oc­cu­pa­tional fund does not per­mit a higher con­tri­bu­tion, the RA route is an op­tion.

“A risk for pen­sion and prov­i­dent funds is that, if they are per­ceived to be too slow in amend­ing the rules to pro­vide for ad­di­tional vol­un­tary con­tri­bu­tions, mem­bers may de­cide to rather in­vest their ‘ex­tra’ funds in an RA fund. This would re­duce the po­ten­tial con­tri­bu­tion flow to pen­sion and prov­i­dent funds. The fact that the tax de­duc­tion has been re­struc­tured may cause funds to con­sider per­mit­ting ad­di­tional vol­un­tary con­tri­bu­tions,” Jithoo says.

Re­gard­ing RA funds, if you have a con­trac­tual life as­sur­ance RA and want to in­crease your con­tri­bu­tions, you will prob­a­bly have to lock in at a higher rate, mean­ing you won’t be able to re­duce con­tri­bu­tions later with­out in­cur­ring a penalty.

On the other hand, the other type of RA, a unit trust RA, al­lows you to in­crease, de­crease or stop your con­tri­bu­tions with­out penalty.

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