Zuma defends pension law
PRESIDENT Jacob Zuma did not act unilaterally when signing the Tax Administration Amendment Act.
Zuma said the law was considered at Nedlac and was also discussed openly in Parliament. It was passed by both the National Assembly and the National Council of Provinces following public hearings, he said.
This follows complaints from the public and threats by labour federation Cosatu to strike over the new law, which effectively means that people who resign from their jobs will not be able to cash in on their pension or provident funds before their retirement age.
The new act, according to Zuma’s office, was government’s way of updating a law it passed in 2013 (in the 2013 Taxation Laws Amendment Act) that harmonised the tax treatment of contributions to retirement funds.
Different types of retirement funds have different tax rules, and provident fund members enjoy no tax deduction for contributions. The government also noted that highincome taxpayers structure salary packages to enjoy relatively high tax deductions, as employer contributions are not currently a taxable fringe benefit for the individual and are not recorded in tax returns.
The 2013 law harmonises the remuneration base for tax purposes for all retirement funds, and consolidates both employer and employee contributions to reduce the scope for tax structuring.
The 2013 law allows for a 27.5% tax deduction up to a maximum of R350 000 per annum. The key condition for enjoying the deduction is that members take a lump sum up to one-third, with the rest annuitised.
This law should have been implemented on March 1 2015, but was delayed by one year to take account of concerns raised by some stakeholders, including Cosatu. The only change to the law that the government is considering this year is to confirm that the new law will take effect on the scheduled date of March 1 2016 alongside an increase in the threshold above which members are required to purchase an annuity.
It is envisaged that workers will be encouraged to save (more) through retirement funds, to curb old-age poverty and excessive dependency on relatives.
Members of provident funds will, similar to pension and retirement annuity funds, be able to claim a tax deduction on contributions.
There are over 2.5-million provident fund members. Around 1.25-million are likely to see an increase in their take home salaries, and many more will receive the tax deduction if they save more for retirement. Lastly, low savings can also result in excessive indebtedness, as individuals have to borrow to meet unexpected expenditure.
#
The government is encouraging everyone who has a job or income to save for retirement.
The effect of the alignment between provident and pension funds will take a long time to have an impact on members, and will not affect provident fund members who are currently close to retirement.
All provident fund members will still be able to take all their retirement savings that would have been accumulated as at March 1 2016 as a cash lump sum when they retire.
The conversion of a portion of the retirement money into income at retirement will only apply to new contributions made by those who are younger than 55 when the legislation comes into effect.
This means that members who are 55 years and older on March 1 2016, when the law comes into effect, will not be affected.
Workers who are below 55 years on March 1 2016 will not be asked to annuitise or take a pension on the portion of new contributions if the total of those accumulated savings are R247 500 or less when they reach retirement.
Irrespective of age, whatever a member has accumulated in the provident fund as at March 1 2016, and the growth on those amounts, will be available to them as a cash lump sum when the person retires.
For most low- and middle-income workers, it will take several years to reach the above threshold, and hence many years before they are asked to annuitise at retirement.