The recent changes made to South Africa’s Tax Administration Amendment Act, specifically governing retirement savings and reform, make perfect sense.
Explaining the newly implemented laws, Nicholson says there are three types of retirement funds, namely Pension fund, Provident fund and a Retirement annuity that are categorised in terms of tax deductibility.
From March 2016, it will move under one umbrella and together with both employee and employer contributions be allowed a 27,5 % maximum deductibility and capped at a maximum of R350, 000.00 per annum across all three funds.
Furthermore, all members of provident funds who are under age of 55 and whose retirement savings, as reduced by their “vested right” amount, is more than R247, 500.00 will be required to buy pensions / annuities using at least two-thirds of this amount.
The reason behind the legislative changes is to address the issue of active employees saving enough for their retirement.
The active employment population simply does not save enough through their work lifetime to retire comfortably and to sustain themselves with sufficient income even if they have spent years contributing. One of the reasons is that they withdraw during their work life instead of preserving funds.
While CRS Legislation acknowledges that the changes have received a mixed response from the broader public, it is important to remember only the provident fund contributions made after 1 March 2016, plus investment growth thereon, for members younger than 55 years old will be subject to the new rules.
The R247 500 (which is referred to in the industry as the de minimis amount) applies to each fund as a separate entity (i.e. per fund). The concept of pensionable salary in terms of tax purposes has fallen away and will now be based on the member’s taxable income or gross employment income. Also, the funds will still base the actual contribution on a pensionable base as registered in the Rules of the particular funds.
Impact on the pocket
The mixed response to these changes in the market have been exacerbated by misunderstanding by some employees and scepticism over what will happen to net salaries, as well as condemnation by trade unions.
The immediate implication of the legislation for people at large is exclusively around preservation.
Prior to the newly implement legislation with a provident fund one could access 100% of capital in cash or annuity with full flexibility.
The reality is that any provident fund member will now be able to deduct their contribution so they may increase their take home slightly and at retirement they will now have to purchase annuity with up to two thirds of the contributions they have made post 2016.
Her advice is split between those with funds currently in place and those just starting the journey. For the former group, their money is safe and nothing has changed other than one will now have to use the funds for what it was intended for. Those in the latter group will have an opportunity to be part of the ‘new generation’ and fully embrace the concepts of preservation and auto-saving.
Nicolette Nicholson is the Head of CRS Legislation.