Old Mutual comments on social security issues & lump sum payments of Retirement and Death Benefits
Old Mutual comments on social security issues
"Old Mutual supports the Minister's comment about the review of the means test for the State Old Age Grant (SOAG)and believes that an increase in the means test limits will encourage more people to save for their retirement, knowing that it won't affect their eligibility for the SOAG. We would also support and encourage the removal of the means test to make the SOAG universal for all South Africans.
The concept of the equalisation of the State Pension Age for women and men was introduced in President Thabo Mbeki's State of the Nation address of the 8th February. A gradual equalisation process is consistent with the practices in most countries, e.g. the UK which will equalise by 2020. However as in the case of the UK, it is more usual for other countries to equalise the retirement age by increasing the age for women. This ultimately reduces the cost of pensions for the State. In developing economies such as South Africa where there is lower life expectancy, it is not inappropriate for the age to be equalised by reducing the eligibility age for men.
As South Africa's premier financial services organisation, the above changes would be very consistent with our view that what is good for South Africa is good for Old Mutual.
Old Mutual also supports the exemption of retirement funds from the new dividend tax replacement for STC. This will continue the progress made since the removal of the Retirement Fund tax and will boost the retirement funds of those citizens saving for retirement."
Old Mutual comments on lump sum payments of Retirement and Death Benefits
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Last year the taxation of lump sum benefits on retirement and death was simplified, but the taxation of pre-retirement lump sum benefits remained unchanged, taxable at average rates above certain tax-free amounts. Clearly the intention is to simplify the taxation of these withdrawals. While it is not clear what the proposals are, possibilities include a specific tax scale related to the size of the lump sum benefit.
Last year too an appendix was introduced to the Income Tax Act which summarised monetary thresholds relating to various aspects of the Act including limits related tax free lump sum benefits, contribution deductibility, commutation limits and the like. It is possible that some of these may be adjusted for inflation.
The rationalisation of the contribution deductions to the various sorts of tax-approved retirement vehicle may also be on the cards. A single overall deductible percentage irrespective of the nature of the vehicle (pension fund, provident fund or retirement annuity fund) may be desirable in many quarters but whether the change will go that far is not clear.
There is also evident a desire to limit the incentives to the wealthy, so a rand cap to contribution deductions appears to be under consideration.
Background
In his 2007 Budget, Finance Minister Trevor Manuel announced a new simpler method to calculate the tax due on retirement fund lump sums and on death benefits paid out by retirement funds.
The new calculation method became effective on 1 October 2007. Prior to 1 October 2007, the calculation of the tax-free portion of the lump sum amount on a member’s retirement or death, used complex formulas. The formulas required that the period of the retirement fund membership and the average tax rate of the member’s salary over the past five years prior to retirement or death, be taken into account, to calculate the tax-free portion of the lump sum amount.
As from 1 October 2007, the member’s years of fund membership and the average rate of tax of the past five years are no longer necessary to the calculation of the tax-free portion. Instead, the lump sum death and retirement benefits, which accrue on or after 1 October 2007, will be taxed as follows:
* The first R300 000 (which is a life-time allowance) plus any disallowed contributions and tax-free amounts paid from public funds less any previous tax-free allowances, are tax-free.
* The next R300 000 is taxed at 18%.
* The next R300 000 is taxed at 27%.
* The balance of any lump sum that remains is taxed at 36%.
