National Treasury announced further changes to the retirement reform on 18 February 2015 shortly before the effective date of 1 March 2016. These changes provide for the postponement of the annuitisation requirement for provident funds for two years, until 1 March 2018.
Should a member resign from employment, they can still access their entire fund values in the pension or provident fund in cash net of withdrawal lump sum tax – no changes introduced.
Members could only access their entire fund values in a retirement annuity fund in limited situations – previous emigration requirements are amended to include instances where persons cease to be resident or where a non-resident departs from South Africa at the expiry of a work visa.
On retirement from a pension or retirement annuity fund, members could take up to a third of their benefits in cash net of retirement lump sum tax, and had to use the balance to purchase a monthly annuity – no changes introduced.
Should a member’s total fund value, for pension or retirement annuity be less than R247 500 at the time of his or her retirement, the benefit can be paid out full in cash. Previously, this amount was R150 000.
Members retiring from a provident fund still have the option of taking the entire fund credit in cash net of retirement lump sum tax (withdrawal), until 1 March 2018.
Contributions to pension funds were previously subject to a maximum deduction of 7,5% of remuneration from retirement funding employment. Contributions to retirement annuity funds were subject to a maximum deduction of 15% of taxable income other than from retirement funding employment. No deductions were available for contributions to provident funds. Employee contributions to provident funds were, however, tax free at withdrawal or retirement.
Effective 1 March 2016, contributions to a pension, provident or retirement annuity fund is subject to a deduction of 27,5% of the greater of taxable income or gross income (limit applies to the aggregate of contributions to all funds) with an overall annual deduction limit of R350 000.
Contributions in excess of the annual limit can be claimed in future years subject to limits applicable in those years. Employer contributions will also be included in the employee’s taxable income but the fringe benefit tax will be offset against the tax deductibility of the employee’s total contribution.
National Treasury indicated in its earlier retirement reform papers that ‘Despite the high membership rates for retirement funds and significant accumulated savings, only about 10 per cent of South Africans are able to maintain the same level of consumption they had before they stopped working. This is explained by the low levels of preservation of retirement savings.’
It is interesting to note that the Revenue Laws Amendment Bill 2016 also makes provision for the Minister of Finance to consult with interested parties, including at NEDLAC, and to report back to Parliament on the outcome of those consultations no later than 31 August 2017.
Author: Muneer Hassan CA(SA) is a Tax Consultant and a Senior Lecturer in Taxation at UJ