Retirement and Long Term Insurance

Retirement funds have gone through a couple of changes in the last two to three years. These changes were in the form of a reduction in the tax rate from 18% to 9%, to finally the abolishment of the Tax on Retirement Funds Act which came about last year.

Once again this area has come under the spotlight this year in the form of streamlining retirement fund registrations and changing pre-retirement withdrawal defaults to improve administration. The proposed changes, however, have not been significant and are merely to complete the agenda that began in 2007. Issues that will be addressed relate to taxation of retirement funds on the termination of an employee’s service, whether or not the funds have been withdrawn. Another issue that will be dealt with will be the taxing of the retirement funds upon a member’s death, irrespective of whether the funds are converted to an annuity.

The impact of these changes, indicate government’s commitment to encouraging individuals to save by investing in retirements funds. At the same time, government will limit the amount that can be contributed by the employees and the employers, by ensuring percentage contributions of various retirement saving vehicles are consolidated. This is to ensure that the tax relief provided is not abused by high income earners.

Another proposed change will be to section 29A (11) of the Income Tax Act, which deals with the limitation formula on expenses that do not directly contribute to taxable investment income. A review of this formula is certain to be welcomed by the Long Term Insurance companies, as the current formula has a number of anomalies and hopefully the review of this formula will take into account current business practices.