New tax laws affect retirement policies

GOVERNMENT has passed its retirement reform proposals under the Taxation Laws Amendment Act, 2015.

Designed to harmonise tax treatment and annuitisation requirements for pension, provident and retirement annuity funds, the following changes will take effect on 1 March:

• Contributions by both employers and employees to pension, provident and retirement annuity funds will qualify for a tax deduction, capped at the lesser of 27.5 percent of the greater of taxable income or remuneration; or R350,000 per annum.
• Contributions by employers to pension, provident and retirement annuity funds on behalf of employees will become a taxable fringe benefit in the hands of the employee.
• The requirement to purchase an annuity will apply to all members, including pension, provident and retirement annuity funds. This implies that on retirement, members will be required to take one-third of their retirement benefit as a lump sum and the two-thirds of their retirement benefit will be paid to them every month as an annuity until they die.
• Vested rights are preserved and those members older than 55 years are exempted from the requirement to annuitise.
• The de minimis threshold is increased from R75,000 to R247,500. This effectively means that members of pension, provident and retirement annuity funds who do not have a retirement benefit exceeding R247,500 at retirement will not be required to annuitise. Only members who have a retirement benefit of R247,500 will be required to annuitise.

There are over 2.5 million provident fund members who contribute to a provident fund. Around 1.25 million are likely to see an increase in their take home salaries, and many more will receive the tax deduction if they decide to save more for their retirement

‘This implies that on retirement, members will be required to take one-third of their retirement benefit as a lump sum and the two-thirds of their retirement benefit will be paid to them every month as an annuity until they die’, the Treasury said in its explanatory memorandum

The changes aimed at improving vertical equity between high and low income taxpayers by imposing a limit on the total allowable deduction to high income taxpayers, and horizontal equity by harmonising the same deduction across all retirement funds.

At the same time, vested rights are  protected, ensuring that the impact of annuitisation takes longer to be felt by provident fund members.

In summary, the deduction cap for retirement fund contributions increases to 27.5 percent of the greater of remuneration or taxable income. This rate applies to the aggregate of contributions made to an individual’s pension, provident and retirement annuity funds. Presently, different contribution caps and deduction bases apply to the three types of funds.

The annual deduction cap is R350 000 (including the cost of risk benefits). Individuals who contribute more in any one year can carry forward any unclaimed amount and deduct these from tax in subsequent years, subject to the deduction limits in those years. Any unclaimed contributions are returned untaxed at withdrawal or retirement.