Retirement fund incentives can boost savings despite delays to pension reform, says Standard Trust Limited

While long-awaited retirement fund reforms have been postponed by at least a year, South Africans should not wait before they increase their levels of contributions.

Jerry Mayaba, Head of Legal at Standard Trust Limited South Africa says it is important that retirement lump sum withdrawals remained at 36% this year despite the top marginal rate of income tax being lifted from 40% to 41%.

While the top marginal rate on income has gone up, it means the government is giving an incentive to save by not raising the retirement fund top rate.

Retirement fund lump sum benefits consist of lump sums from a pension, pension preservation, provident, provident preservation or retirement annuity fund on death, retirement or termination of employment due to redundancy or termination of the employer’s trade.

“This five percentage point difference is a crucial saving that needs to be factored in to long-term savings strategies. It’s there – use it. Those five percentage points will amount to a lot over the long term and South Africans should therefore be encouraged to put a bit more into retirement to benefit,” says Mr Mayaba.

Meanwhile, it is expected that from March next year contributions to retirement funds will be increased to 27.5% of the greater of taxable income or remuneration for the year. These changes were originally anticipated from March this year but the entire retirement reform process ran into a snag when it faced pressure from unions and scepticism from the private sector that fund mandates and administration could be changed in time.

“While contributions are set to be capped at R350,000 per tax year when these changes happen it is important to remember the cap will apply to the aggregate of contributions to pension, provident and retirement annuity (RA) funds,” says Mr Mayaba.

The changes are expected to place RA funds in a strong position because current RA fund contributions are the greater of 15% of taxable income other than from retirement funding employment, R3 500 less current deductions to a pension fund, or R1 750.

Mr Mayaba says RA’s pay benefits separately to an estate – estate duty tax is therefore not paid if you die before retirement. “Only if there are no nominated beneficiaries or dependants will the money be paid into your estate. This can also save a lot of time and hassle as beneficiaries will have money and won’t have to wait for an estate to be wound up – which can take many months,” says Mr Mayaba.

Standard Trust Limited is a wholly owned subsidiary of the Standard Bank Group Limited, with over 130 years of fiduciary services, and it believes these retirement changes could make savings more attractive to younger and older generations alike.

“It is a very relevant discussion in the wealth space as everyone needs to be aware of the dangers of not starting early, or maximising the benefits that are and will become available. It is also important to ensure estate duty taxes are minimised where possible and that a will is drafted that covers all eventualities, like a beneficiary appearing on a policy but not a will,” says Mr Mayaba.

The reality facing all savers is the anti-avoidance gap is being closed by the authorities as there cannot be an unfair advantage to some and not others.

“This, however, does make vehicles like RA’s quite attractive again as remember the investment growth is not taxed and you can access savings at 55. You can also keep it when you change jobs, or easily stop contributing for a period, or access the full benefit if you emigrate,” says Mr Mayaba.

While wealthier people always looked to have an RA as an extra savings tool, the changes could ease pressure on employers, which previously paid 7.5% towards a pension fund, which was never enough.

The changes could also relieve pressure on the state, which is being burdened by people seeking grants in old age.

“However, savers need to be aware that a new maximum age at which withdrawals may be taken is being spoken about. This could limit the tax planning opportunities beyond that age limit. Remember that in 2008 the upper age limit of 70 for membership of a RA was removed, enabling members to remain invested and keep contributing to RA funds for an indefinite period. However, even if this change does happen, the above benefits cannot be ignored,” says Mr Mayaba.

“There has been a lot of focus on the increase in wealth taxes, but not enough focus on the incentives to save more on retirement. The bottom line is South Africans are not doing enough to save and should definitely make greater use of the benefits that are available. From next year or the year after, we expect even more benefits to arise, but retirement is about the long term, so it is better to start now,” concludes Mr Mayaba.

The following table explains how retirement lump sum withdrawals are taxed:

Taxable Income (R)

Rate of Tax (R)

0 – 500 000

0% of taxable income

500 001 - 700 000

18% of taxable income above 500 000

700 001 – 1 050 000

36 000 + 27% of taxable income above 700 000

1 050 001 and above

130 500 + 36% of taxable income above 1 050 000