Industry seeks clarity on retirement reforms during Budget Speech

This is according to Steven Nathan, Chief Executive of 10X Investments (10X), who says that whilst he isn't expecting any announcement of substance affecting the retirement fund industry, he would like further clarity and confirmation of developments and announcements made by government in 2013. "We don't expect Treasury to spring any surprises on the market. The sector has already been through a reform process; the key proposals have already been promulgated, relating to the uniform tax treatment of retirement funds and compulsory preservation post-retirement."

 

For the 2014 Budget Speech, Nathan would like further clarity and confirmation on compulsory preservation pre-retirement and non-retirement savings. "I expect that Treasury will provide some greater detail and insight into the plans for both of these. The latest set of retirement reform proposals has far-reaching consequences for preservation funds. These could transform the current savings vehicle, which presently accepts only fund transfers and makes only occasional payments, into a multi-purpose tool required to make regular payments."

 

Treasury has proposed to make it compulsory to preserve retirement savings on withdrawal before retirement. From the effective date, employees will have to transfer the full balance to a preservation fund. However, their vested rights will be protected: fund members may then still withdraw the amount in their retirement account at the effective date (and the subsequent growth thereon) as a cash lump sum, subject to current taxation rules.

 

He says that on transfer to a preservation fund, these amounts will be referred to as the 'initial deposit'. "Members will be permitted one withdrawal per year against their initial deposit(s), but the amount of each withdrawal will be limited. No effective date has yet been set for these proposals and would need to take into account the daunting administrative implications of them."

 

Nathan says that one problem with this proposal is that withdrawals will be taxed per the withdrawal lump sum tax table, not per the income tax table.

 

"For low income earners, this rate is likely to be higher than the average tax rate on a similar income - someone drawing down more than R22 500 on their preservation fund will start paying 18% tax on that income - this average tax rate normally only kicks in on an annual income above R390 000."

 

Government also plans to implement a tax-preferred savings and investment account - known as an Individual Savings Account (ISA). All returns accrued within these accounts and any withdrawals will be exempt from tax. The account would have an initial annual contribution limit of R30 000 and a lifetime limit of R500 000, that will be increased regularly in line with inflation. "It is expected that the new accounts will be introduced by 2015 and will co-exist with the current tax-free interest income dispensation, but this has yet to be confirmed," he says.

 

Nathan says that Treasury has not budged on allowing withdrawn amounts to be replaced. "We believe that this is counter-intuitive and we hope that Treasury finds a solution. The ISA is intended as a short-to-medium terms savings product, yet it penalises those who make early withdrawals."

 

Speculating on other issues that Treasury may address during the Budget, Nathan says that these could include; mandatory retirement saving, a revision of the withdrawal/retirement lump sum tax tables, as well as extending the Old Age Grant (OAG) to everyone.