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Category Retirement
SUB CATEGORIES Annuties |  General |  Savings & Investments | 

Budget Speech must not leave retirement industry in limbo

23 February 2016 Steven Nathan, 10X Investments
Steven Nathan, CEO of 10X Investments.

Steven Nathan, CEO of 10X Investments.

Given the South African Government’s recent U-turn on the annuitisation of provident funds at retirement, it is critical that the Budget Speech on 24 February provides clarity as to how provident funds will be treated in two years’ time. This is imperative if Government is committed to the policy objectives that underlie the reforms.

“The events of last week, relating to the postponement of reforms due to be implemented from 1 March, have created a sense of uncertainty, not only on Government policy, but also on its ability to follow through. It’s critical that the Budget Speech provides assurance on these issues now, and not in two years’ time,” says Steven Nathan, CEO of 10X Investments.

A key objective of the reforms was to make the retirement savings system simpler, so that more people would make use of it. “But simplicity requires certainty. Savers can only plan their financial affairs if they have a clear view of what the law is now and in the future. Without such clarity, financial planning becomes complicated,” says Nathan.

“We need clarity on the tax breaks that will be available to provident fund members, whether annuitisation will be compulsory and whether members of pension funds will be able to move to provident funds,” says Nathan. “The industry has already been in a state of limbo for the past eighteen months, since the reforms were first delayed in the latter half of 2014.”

Nathan warns that if the postponed reforms don’t happen, and the tax benefits for provident funds are reduced, it could spark further conflict. “Employees who value the higher tax deductions (mainly high earners) may want to convert their provident fund into a pension fund. Savers who treasure the lump sum at retirement (most likely low earners), however, may want to stay in or convert to a provident fund.”

“This has the potential to cause friction and may even force employers to create separate funds for different employees. This brings us back to where we started: different fund types with different rules for different categories of employees. The system will remain complex, ultimately pushing up the cost of saving.”

He adds that if the Minister does not create certainty on these issues now, it undermines the other policy objectives outlined in the President’s State of the Nation address.

Nathan says that the key objective of the retirement reform proposals is to strengthen retirement savings, by ensuring that the system serves the needs of South Africans better and reduces reliance on the State.

“By reducing reliance on social security, the Government will one day be in the position to reduce the country’s debt burden. While these benefits may be some way off, it’s important to send the right signals now, to stave off further credit downgrades, lower our cost of debt, assure foreign investors and grow the economy,” Nathan explains.

“The Government may be sincerely committed to improving social security, but the reality is that if the economy stagnates, we’re unlikely to have the economic resources to improve the gaps in income and achieve this goal,” he adds.

“The end effect is that the Government’s turnabout on retirement reforms could ultimately achieve the exact opposite of what they were designed to achieve – tax harmonisation, simplicity and a higher savings rate. While we can ill-afford such a late reversal in policy, or a Government that wavers in times of crises, we should not make matters worse by adding two more years of policy uncertainty,” concludes Nathan.

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