The ins and outs of retirement post 1 March 2016

By all accounts, 2016 looks set to be a watershed year for the financial services industry. Regulators and government are pushing ahead with legislation that will both encourage transparency and encourage reform in the industry.

One of the sectors that is set for significant change is the retirement sector. As of March this year, all retirement vehicles will be taxed in the same manner and retirees will only be able to take a certain amount of their savings as a cash pay-out. They will then be required to purchase an annuitized product with the remainder of their capital.

Benefit the people

The key question on everyone’s lips is whether the T Day implementations will benefit the public. According to Michelle Acton, Principal Consultant at Old Mutual Corporate Consultants, there will be a benefit for all, but one must remember that each person will be affected differently.

“Provident fund members who are currently contributing to their fund will now receive a tax deduction, which means that some members will have a higher take home pay from March. All members who contribute more than R350 000 per year, will no longer receive the tax deduction they used to receive, but any undeducted contribution will be rolled over to the next tax year and deemed to have been made in that tax year.”

These changes will not have an impact on members of  provident funds who are over 55, as long as they remain on the current provident fund.

For members of provident funds who are under 55, this change may impact the structure of how their retirement benefit will be paid.

Additional benefits

There are other benefits these changes can offer the public. Acton points out that these include:

• Members of all approved funds (Pension, Provident and Retirement Annuity Funds) will be afforded a contribution deduction of 27.5% of the greater taxable income or remuneration, subject to a yearly maximum of R350 000.

• Employer contributions to retirement funds will be taxable as fringe benefits, with these contributions being deemed to be employee contributions for the purposes of claiming the deduction.

• The rights of Provident Fund members to take retirement benefits in cash will be protected for all benefits that they have accumulated up until T-day plus the growth thereon until their retirement. This amount will not form part of these members’ “retirement interest” for the purposes of applying the annuitisation requirements (explanation below) that they will be subject to from T-day.

Achieving outcomes

What is important is that government achieves the objectives that it set at the beginning of the retirement reform process. According to government, the number of people who could retire comfortably in South Africa was alarmingly low and government hopes to remedy this through the retirement reform process.

“Over the long term, the intention of this change is to encourage members to contribute more towards retirement savings. The change also hopes to encourage those who have reached retirement to manage their savings to last over the duration of retirement. By themselves, these changes will not ensure that people retire comfortably. Consistent and sufficient savings over your entire working career is the best way of improving your retirement outcome,” said Acton.

Global connectivity

Because the South African financial services industry is one of the most developed industries on the continent, it has significant connectivity with the rest of the world. This is beneficial, but it also means that the industry needs to meet certain requirements.

“Retirement and tax systems differ significantly around the world to reflect the nuances of local needs. The fact that successful retirement provision generally requires a commitment to save sufficient amounts over a long period is a fairly universal reality and so most systems have mechanisms in place to encourage this – normally through some form of tax incentives.”

She adds that there remain significant differences in the detail around the world due to varying social and economic structures across countries. “As such, the goal should not be to simply align South African retirement legislation with the rest of the world, but rather to structure it so that it most appropriately fits local conditions and requirements over time.”

Editor’s Thoughts:
Retirement should be golden years, the time when your clients look forward to fulfilling all the dreams that they couldn’t during their working life. Sacrifices need to be made to achieve this, and government will be lending some form of a helping hand in this regard. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

Comment on this Post

Name*

Email Address*

Comment*

 

Submit Comment