FANews
FANews
RELATED CATEGORIES
Category Retirement
SUB CATEGORIES Annuties |  General |  Savings & Investments | 

Retirement Reform – Why you should not be afraid

06 November 2014 Cindy Wilson, David Crossley, BDO South Africa

A great deal of controversy has surrounded the Government’s proposed legislative changes to current Retirement Funds in 2015. Already a number of employees have taken extreme measures and have resigned from their employment in order to cash in their Provident Fund savings. These actions were taken under the mistaken belief that the Government would not allow members access to their benefits, once the law was implemented.

This is all conspiracy however, as nothing could be further from the truth. The Government’s main objective in making the changes to Retirement Funds is to encourage people to save more for their retirement. Secondly, the changes are to help make this process as simple and as tax effective as possible.

These considerations and amendments have resulted in a possible two year delay by National Treasury. However, these changes will still be implemented and it is essential that everyone understands the implications of these proposed changes. A significant modification is:

• Employer contributions to retirement funds will be taxed as fringe benefits in the hands of employees. The employer may then deduct up to 27.5% of total remuneration in respect of contributions (employer and employee) to pension, provident and retirement annuity funds, subject to an annual cap of R 350 000.

The next major change relates to members’ options on retirement.

If we accept that the purpose of saving for retirement is to create a regular income when we retire, then it stands to reason, for future financial security, that a limit be applied to the lump sum that members can cash in when they reach retirement age. The following are to be taken into consideration:

• Provident funds will align with pension and retirement annuities funds, and all will be subject to the same taxation regime. At retirement, one third of the fund value can be taken as a lump sum, while two thirds must be used to buy retirement income, regardless of whether it is a provident or pension fund. This will, however, only apply to contributions paid AFTER the implementation date on provident funds and will not apply to the value a member has in the provident fund at the implementation date (plus future growth on this value). This value may still be paid as a lump sum going forward and will not be subject to the one third limit that applies to contributions after implementation date. Members of provident funds above the age of 55 at the implementation date will also still enjoy full access to their full benefit at retirement.

• Commutation threshold upon retirement will be increased from R75 000 to R150 000 for all retirement funds. This means that if the retirement benefit of a member is R150 000 or less, the member will be allowed to take their whole benefit as a cash lump sum; he or she will not be required to buy a pension with at least two-thirds of his benefit.

• Tax free portability of retirement funds. Fund benefits will be capable of being transferred between all retirement and preservation funds tax-free. In particular, tax-free transfers from pension funds and retirement annuities to provident funds will now be tax-free.

A noteworthy fact is that members will still be allowed to take their withdrawal benefits in cash. Members are not required to keep their withdrawal benefits in a retirement fund when they change employers.

A common reaction to change is anxiety, rumour mongering and emotion which often takes precedence over fact and actual situation. To this end, individuals are urged to consult their respective employers or financial planners to ensure that they have the correct information at hand before making permanent, and possibly damaging, financial decisions.

Quick Polls

QUESTION

The Magnificent Seven technology shares are reshaping global equity markets, and making for some tough adviser-client discussions. How are you managing your clients’ return expectations during this tech age?

ANSWER

Diversifying beyond tech giants
Focus on long-term value investing
Increasing tech exposure in portfolios
Reinforcing realistic expectations
fanews magazine
FAnews November 2024 Get the latest issue of FAnews

This month's headlines

Understanding treaty reinsurance – and the factors that influence it
Insurance brokers: the PI scapegoat
Medical Schemes' average increases for 2025
AI is revolutionising insurance claims processing and fraud detection
Crypto arbitrage: exploring the opportunities and risks
Subscribe now