National Treasury’s retirement funding proposals hit the mark, Simeka Consultants & Actuaries
Harmonised treatment of pension funds, provident funds and retirement annuities, along with making preservation funds compulsory, are seen as two of the major positive features of National Treasury’s ongoing retirement funding amendments, which were updated in Finance Minister Pravin Gordhan’s February 27 Budget presentation.
The proposed scrapping of the “means test” for the state-funded old age grant by 2016 is a very positive step that will stimulate retirement savings for the millions of members in the lower income bracket. However, there is some concern that that the introduction of tax-preferred savings and investment accounts by April 2015, could reduce retirement fund savings, especially for taxpayers in lower and the higher income brackets.
Simeka Consultants & Actuaries, part of the Sanlam Group, recently held “spotlight” sessions in the Western Cape and Gauteng to discuss the latest retirement funding proposals. They are “very positive” about the latest retirement reforms proposals. “One gets the sense that National Treasury and the retirement industry are developing a clearer picture of the outcomes that are required and that with every paper released, the proposals are more workable and practical,” said Awie de Swardt, Simeka’s head of benefit consulting.
Simeka said the key themes outlined in the Budget included tax harmonisation, preservation, annuitisation, the phasing out of lump sum benefits – especially relating to provident funds – and the value proposition for retirement fund members.
“To me, the most important elements of what was said in the budget are the harmonisation and alignment of pension funds, provident funds and retirement annuities, and the fact that it will become mandatory to utilise preservation funds,” said De Swardt.
He stressed that further consultation on retirement funding proposals would take place between National Treasury and the retirement planning industry until May this year, after which the process would move towards the legislative stage.
It is expected that P-Day (Preservation Day) and T-Day (Taxation Day) will come into effect in 2015 at the earliest. These “days” will trigger the new rules relating to preservation and taxation of retirement savings.
Under the proposed new system, individuals will be able to contribute 27.5% of the greater of remuneration or taxable income to yearly retirement savings, with an annual cap of R350,000. The amount will comprise employer and employee contributions. It is estimated that the cap will only impact individuals earning more than R1.3 million a year.
Concern about how tax-preferred savings and investment account could impact retirement savings priority
While any efforts to improve South Africa’s low savings rates must be welcomed, Simeka consultant Lance Hoffman, is concerned that the introduction of tax-preferred savings and investment accounts in April 2015 could create “significant competition” for retirement funds.
Under the proposals, individuals will be able to invest R30,000 a year through a range of interest-bearing and non-interest bearing vehicles, with a lifetime limit of R500,000, regularly adjusted in line with inflation.
“Our estimations are that it would still be better for individuals to maximize their retirement savings as a first priority and only then contribute to this proposed tax incentivised savings scheme. The tax free investment will however be very attractive and totally flexible and we suspect that for many the objective will be to save up the half a million rand as a first priority and only then increase contributions to retirement funds. In this context the proposed savings scheme may well place pressure on the minimum contribution levels of retirement funds,” said Hoffman.
“Simeka supports this tax incentivised savings proposal, but we would like to see it in some way more closely linked to retirement savings. It would also make sense for deductions to be made from employer payrolls directly into these savings and investment accounts.”
Hoffman is concerned that if the new savings system is introduced without some modifications, it could lead to many individuals directing funds to these accounts and then only “topping up” their retirement funds as an afterthought.
Meanwhile, Freddy Mwabi, an actuarial specialist at Simeka, believes the phasing out of the old age grant “means test” by 2016 will help to remove a negative influence on retirement savings.
“The current means test is a disincentive for many people to save for their retirement. But with the means test removed, there will no longer be a reason for workers to consume their assets in order to qualify for the old age grant,” he said.
“Scrapping the means test will shift the thinking of many retirement fund members towards preserving their savings, which has to be a good thing.” Summarising National Treasury’s latest retirement and savings proposals, Kobus Hanekom, Simeka’s head of strategy, governance and compliance, stressed that neither the trustees nor the members of provident funds will be under any pressure to protect their vested benefits. Over time however new contributions will be taxed and treated similar to those of pension funds.
He said the tax-preferred saving and investment account proposal was “too attractive” in its current form, potentially impacting on retirement savings, but welcomed the phasing out of the “means test” for old age grants as this will “change behaviour and be good for the retirement savings culture.”
“We have reached a bit of a tipping point now in retirement reform in South Africa and from this point on things are likely to happen faster than you think," added Hanekom.