As part of on-going reforms to the retirement industry, government introduced significant changes to retirement funding in this year’s budget.
Changes to how you contribute
From March 2012 all employees will be allowed to deduct up to 22.5% of their total taxable income for contribution to retirement funds up to a maximum of R200 000. This is part of an on-going proposal to bring provident funds in line with pension funds and retirement annuities. Employer contributions will no longer be tax free and will be treated as a fringe benefit in the employee’s hands, encouraging the move to employee contributions which will simplify the structure of salary packages.
This effectively allows employees contributing to pension funds and retirement annuities to significantly increase their tax-free savings and employees contributing to provident funds can now receive the tax benefit in their hands as opposed to the employer. This move will allow people who find they are underfunded for retirement to increase their retirement savings in a tax-friendly environment, but the ceiling will limit the more well-heeled. It does also mean people need to think carefully about how they split this contribution budget between retirement savings and approved insurance policies.
The lack of employer contribution tax deductibility is probably the death knell for the few remaining defined benefit funds. We believe this may be an oversight and Liberty will try to lobby some form of recognition.
Change from pensionable salary to taxable income
It makes the system far simpler to understand as the tax deduction will be levied against taxable income as opposed to pensionable income which will simplify the tax benefit calculation. It also increases the portion of one’s salary that you can use for the tax calculation as it would include bonuses and car allowances for example.
Increase in tax-free amounts
The tax free amount on retirement has increased from R300 000 to R315 000. We had hoped for this amount to move annually with salary inflation, and a similar adjustment being made to the cash free amount on withdrawal.
Provident Fund days are numbered
National Treasury clearly indicated in the Budget that they would like to bring provident funds rule in line with the rules applicable to pension and retirement annuity funds. This will include a change to current legislation which allows provident fund members to make a full cash withdrawal on retirement. Proposed changes will require members to invest two-thirds of their provident fund into an annuity on retirement.
However Treasury has confirmed that the rights of existing provident fund members will be maintained and will not affect current members. Therefore there is no need to panic now and try to cash in your provident fund.
It does create a slight anomaly in that a member withdrawing just before retirement can still receive the full cash benefit (with admittedly less tax relief).However comments were made in the budget that compulsory preservation will be discussed and then possibly implemented in due course.
Collective Investment Schemes to offer living annuities
The proposals are that collective investment schemes should be able to directly provide living annuities to clients to improve competition in this space. Living annuities do not offer the same protection to pensioners as a life annuity provided by a life company and therefore do not need the same capital requirements to ensure delivery to policyholders.
This may reduce living annuity costs; however pensioners need to obtain advice before selecting living annuities as these vehicles do not protect pensioners from living longer than their money lasts.