Budget reaction: Retirement

Budget speech commentary - Financial Intermediaries Association of Southern Africa

Financial planning:

Gavin Came, Chairman of the Financial Planning Committee of the FIA, welcomed the Retirement Reform update that was published alongside the 2013 Budget. “The note sets out National Treasury’s latest thinking on a wide range of retirement reform issues including the taxation of retirement fund contributions and withdrawals, preservation of accumulated retirement savings and the treatment of non-retirement savings,” says Came. “It is now up to industry stakeholders to further engage with Treasury on these proposals by the stated 31 May 2013 deadline. The FIA looks forward to representing the views of its member intermediaries to government in this regard”.

“Reforming South Africa’s retirement landscape is a difficult balancing act,” he adds. “National Treasury has to both accommodate individuals that have been saving for many years under the old dispensation while at the same time recognising the urgency of the reform process”.

“The FIA believes that Treasury’s ‘2015 or later’ approach to many of its proposals, particularly where pre- and post-retirement preservation are concerned, make sense given the amount of stakeholder consultation that still has to take place”.

Retirement reform proposals: commentary from 2013 Budget

Windall Bekker, Partner at REZCO Investment Consulting

Finance Minister Pravin Gordhan has outlined further proposals regarding retirement reform at the National Budget Speech for 2013 in the areas of the taxation of retirement funds; governance of trustees; preservation and annuitisation.

Windall Bekker, Partner at REZCO Investment Consulting, says that as predicted previously, the existing governance duties of retirement fund trustees and their personal liabilities will be increased once these proposals become legislated.

“We support the principle behind increasing governance of trustees of retirement funds, as these people play a hugely important role. However, we believe the current proposals mean that retirement fund trustees would be held a lot more accountable than is currently the case. Their reliance on external consultants with specialist expertise would need to increase, and this would have a corresponding effect on fund costs. Furthermore, trustees are set to face increasingly onerous obligations, so the meeting that the Minister of Finance wishes to convene later in the year will be very important.”

In addition, says Bekker, the move towards compulsory preservation upon leaving an employer-sponsored retirement fund continues. “It is interesting to note the new development that for the first time, we see proposals to allow for withdrawal from a retirement fund, albeit using prescribed parameters. This is clearly to make allowances for the fact that sometimes people are cash-strapped due to circumstances and is a compromise between allowing for the preservation of monies meant for the retirement years and the immediate present, when people have duties and families to look after. We do support this principle,” comments Bekker.

“There is an apparent dislocation between the theory and the country’s actual unemployment levels. However, we do believe that the initiative to simplify products and make them more transparent is an excellent starting point, as is the reference to the inappropriate use of guaranteed retirement products.”

Bekker also has further commentary to offer on the on-going drive to close the gap between the way that pension and provident funds are run, annuitisation proposals to better regulate people’s annuity choices at retirement, and his satisfaction that prescribed investment was apparently not on the agenda for the time being.

Bekker also notes that the increase in the current account deficit and balance of payments will affect retirement fund investments and trustees need to consider the impact of these factors on their investment strategies going forward.

Retirement Reform

Alastair Morphet, Director, Tax, Cliffe Dekker HofmeyrTreasury released a further Consultation Paper together with the Budget documentation. The reform Consultation Paper is trying to bring together the strands of thinking that were set out very clearly in the four papers released by the National Treasury in September/October 2012.

From a tax perspective the critical issues are that Government will proceed with the implementation of tax preferred savings and investment accounts (along the lines of the UK's ISA). All returns accrued on these accounts and any withdrawals would be exempt from tax. The account would have an initial annual contribution limit of R30,000 and a lifetime limit of R500,000, which it is intended to put up in line with inflation. These new accounts will be introduced by April 2015.

At present the current tax free interest income annual thresholds continue, but with effect from 1 March 2013 is put up to R34,500 for individuals 65 years and over, and from R22,800 to R23,800 for individuals below 65 years. These thresholds will not be adjusted for inflation in future.

With regard to individuals' contributions to pension and retirement annuity funds, Treasury is planning to implement legislation, and it is not clear whether this would be effective March 2014 or some time in 2015, in terms of which employer's contributions will be treated as a fringe benefit. Individuals will be permitted to deduct from their taxable income or their employment income up to 27,5% for a contribution to such fund, up to a maximum of R350,000. Last year they were considering having two different scales depending on your age, and have obviously decided to streamline this with one flat rule.

It is further proposed that the annuitisation requirements of pension funds will start to apply to provident funds from a certain date. Existing balances in provident funds and the growth on these, will not be subject to annuitisation. This requirement will not apply to provident fund members older than 55 years at the date of implementation of the new legislation. Government's goal is to reduce the complexity of the retirement system. It is proposed that contributions in excess of the annual cap of R350,000 could be rolled over to future years.

The Consultation Paper indicates that the means test for the old age grant will be phased out by 2016; and the de minimus requirement for annuitisation of retirement funds will be raised from R75,000 to R150,000. It appears from the executive summary that living annuities will be eligible for selection as a default product from a retirement fund, provided that certain design tests set out by the Treasury are met. Trustees that make commission free financial advice available to members on retirement, paid for out of the fund, will be given some legal protection in respect of the choice of default offered to members.

An interesting point is raised under the heading "Taxpayers with multiple sources of income." These people are often faced with high tax liabilities on assessment, because of the aggregation of their incomes. Individual employers and particularly pension funds are typically unaware that there are two or more income streams

for an employee or pensioner, and each calculates the PAYE as if there was only one. Government will look to address this during the course of the next year. They are considering either higher levels of withholding by employers (but they acknowledge confidentiality as a concern), holding employees responsible for the PAYE at a higher tax rate to take into account the aggregation effect; SARS informing such taxpayers and suggesting preventative measures, and possibly temporary relief in the case of widows/widowers.

Can South Africans afford to move to a preservation fund in light of increasing costs?
By Vedika Andhee, Director for Tax at Ernst & Young

The minister announced that “Retirement funds will be required to identify appropriate preservation funds for exiting members, who will be encouraged to preserve when changing jobs.” The question that arises is whether the average South African can afford to save/retain the money placed into retirement funds (via movement into a preservation fund) as opposed to withdrawing the money in order to subsist.

According to the Income and Expenditure Survey (IES) 2010/2011 released on 6 November 2012 by Statistics South Africa, the average South African household expenditure increased by 69.5% over a five year period.

The average annual household expenditure across the various population groups ranged from R55 920 to R314 524 per annum (total average of R95 183 per annum). Unfortunately, the 2012 IES figures have not been released as yet, however it was stated in the IES that at constant 2011 prices, they foresee a real increase in spending of 24.6% or approximately R18 779 per annum. Stats SA maintain that the main components of this expenditure “remain housing (including water, electricity and other utilities), transport, food and miscellaneous goods and services...”

In particular, individuals who are retrenched are more likely to withdraw from their pension/provident funds in order to pay their day-to-day living expenses including debt as circumstances do not afford them the luxury of moving their money to a preservation fund.

Some may argue that the tax-free component of R315 000 for the retrenchment severance pay combined with the retirement fund withdrawal is generous. However, for an average household, the R315 000 is likely to last less than 2.5 years. Using the statistics from the IES, for some individuals, this amount could last less than a year.

In light of the above and the predicted year on year increase in household expenditure of approximately 24.6% per annum, perhaps the Minister should have considered adding further tax relief for individuals who will be retrenched in the upcoming months.