Budget provides clarity on saving proposal for retirement sector
04 March 2014
Steven Nathan, 10X Investments
Steven Nathan, Chief Executive of 10X Investments.
As expected, the Budget Speech held few fresh developments for the retirement fund industry and retirement savers this year, other than the anticipated revision in the lump sum tax tables.
According to Steven Nathan, Chief Executive of 10X Investments (10X), the revised retirement tax tables underline National Treasury’s commitment to secure the longevity of savings, by further incentivising fund members to preserve rather than withdraw, on exiting their fund.
Lump-sum benefits are taxed according to two tables – pre-retirement withdrawals (mainly following resignations) and at retirement. The former has not been adjusted since its introduction in 2007, while the latter was adjusted once, in 2011. The taxable income brackets are increased by about 10%. The changes are effective immediately.
"The tax penalty on early withdrawal has become more severe”, says Nathan. "The tax-free lump sum at retirement has been increased by almost 60%, from R315, 000 to R500, 000; the tax free lump sum on withdrawal only by 11% (from R22, 500 to R25, 000).”
Fund members withdrawing pre-retirement now pay almost R86, 000 more tax on the first R500, 000 than those retiring. And comparing the tax relief on the first R1m, withdrawing members pay 6% less tax in terms of the revised tables, whereas retiring members now pay 26% less.
"The incentive to preserve is now greater than ever”, says Nathan.
Legislation has already been passed by Parliament to improve governance over pension and provident funds, and to align the rules and tax treatment of pension and provident funds, while at the same time protecting vested rights.
According to Nathan, this legislation is intended to improve the longevity of savings. "From 1 March 2015 provident fund members will, like pension and RA fund members, be required to use two-thirds of their fund investment to purchase an annuity. The new rules will only apply to contributions made after the effective date and on the return earned on those contributions. Provident fund members who are 55 or older on this date are exempt from these provisions, as are retirement balances below R150, 000 (previously R75, 000).”
The recently passed Taxation Laws Amendment Act, 2013 increased the deduction cap for retirement fund contributions to pension, provident and retirement annuity (RA) funds to 27.5% of the greater of remuneration or taxable income. "Presently, different contribution caps and deduction bases apply to the three types of funds. The annual deduction cap is R350, 000 (including the cost of risk benefits), with only the employee being able to claim contributions. Employer contribution will be neutralised by way of a fringe benefits tax charge. This change will also come into effect on 1 March 2015.”
More regulatory reforms are on the way. "National Treasury plans to issue another draft paper shortly, setting out proposals to make the system simpler and fairer”, adds Nathan. "We expect the paper will elaborate on important topics such as compulsory preservation pre-retirement, which was not addressed in the Budget Speech. The paper will also look at ways to lower costs in the retirement fund industry and how to cover employees, who presently do not have access to an employer-sponsored retirement fund.”
The Budget Speech confirmed National Treasury’s intention to proceed with the tax-preferred individual savings accounts (ISA), to encourage household savings. As previously announced, these accounts will have an initial annual contribution limit of R30, 000, to be increased regularly in line with inflation, and a lifetime contribution limit of R500, 000. All returns accrued within these accounts and any withdrawals will be exempt from tax.
"This will co-exist with the current tax-free interest income dispensation. We were hoping that Treasury would change their stance on allowing withdrawn amounts to be replaced. The ISA is intended as a short-to-medium terms savings product, yet it penalises those who make early withdrawals,” says Nathan.