The Retirement Funding Industry has been in sixes and sevens over the last few years with the heralding in of significant legislative amendments aimed at leveling the playing field in respect of the tax treatment of retirement fund contributions and the form in which the retirement benefits may be taken. The ultimate goal is the consolidation of pension and provident funds in favour of the operation of one retirement fund. The latest version of these amendments was promulgated in the Taxation Laws Amendment Act 2015 (“TLAA”), made effective from 1 March 2016.
In terms of the TLAA, there will from 1 March 2016 be no difference in the tax treatment of retirement savings contributions made by a member or by an employer to all pension, provident and retirement annuity funds, with the tax-deductibility ceiling being increased to 27,5% of the greater of “remuneration” and “taxable income”, capped at R350,000 per annum. Any contributions that a Fund uses to pay for insurance benefits (such as death and disability) and administration costs form part of the new 27,5% limit.
There are no changes in the form in which retirement benefits may be taken from a pension fund or retirement annuity fund (up to 1/3 lump sum and the balance providing a monthly pension), except that the limit up to which the total Fund Value can be taken as a full lump sum cash benefit has been increased to R247,500.
However, there are significant changes in the form in which retirement benefits may be taken from a provident fund. Accumulated provident fund savings up to 1 March 2016 may still be taken as a full lump sum cash benefit on retirement from the provident fund (called a “vested right”), but new provident fund savings from 1 March 2016 onwards that are taken at retirement will be subject to the same format as pension funds, i.e. up to 1/3 lump sum and the balance providing a monthly pension. If the total retirement savings in the provident fund after 1 March 2016 do not exceed R247,500 at retirement, the full amount may be taken as a cash lump sum and not be subject to the 1/3 lump sum and 2/3 monthly pension split. There are additional provisions for members who are 55 years of age and older on 1 March 2016 if they retire out of the same provident fund they were a member of on 1 March 2016 in that their total retirement savings before and after 1 March 2016 may be taken as a cash lump sum benefit.
The uncertainty in the industry has arisen due to the repeated changes in the draft bills, the one-year delay in implementing the amendments and more significantly, the threats made by Cosatu to embark on a national strike and withdraw support for the ANC in local government elections if the amendments are not scrapped. At the time of going to press, it appears from media reports that the Government is about to do a U-turn and remove some aspects of the amendments that Cosatu are opposing (such as compulsory annuitisation for provident fund members). This will probably result in further amendments being made to the TLAA, as well as corrections to significant drafting errors affecting private pension funds, all of which will be processed through Parliament and made restrospective.
By Kevin Alborough, Chairman of Human Alliance and Independent Trustee