Retirement reform has been a discussion within the industry a number of years. The latest tax amendments aimed at levelling the playing fields between the various types of retirement funds was signed into place recently. The majority of these changes were contained in the 2013 and 2014 amendment acts, but the implementation was delayed to allow for further consultation. The changes being proposed were discussed by various bodies in the industry, relevant comments were provided to and considered by the relevant authorities prior to the law being enacted.
The need for retirement reform in South Africa was brought up by the issue that people are not retiring with sufficient income even when they have spent many years contributing to their retirement funds. “Statistics show that only between 6% and 10% of members of funds retire with a sufficient income to maintain their standard of living. Statistics also reflect that the vast majority of members do not preserve their funds when they change jobs but encash their benefits which is a main contributor to the lack of funding for retirement. In addition members encash the maximum value of their fund benefit they can access at retirement in order to settle outstanding debts,” says Ms Evette Vanrenen-Linford, Principal Officer: UJ Pension Office.
The retirement reform changes take effect from 1 March 2016. These changes were initially planned for 1 March 2015, but were postponed just prior to the implementation.
Ms Vanrenen-Linford pointed out that it is important to note that should a member resign from his / her employment, they can still access their entire fund values in the pension or provident fund in cash – resignation benefits in pension and provident funds have not been affected by this change in legislation.
With regard to the changes to the payment of retirement benefits in provident funds, it is important to remember that vested rights have been protected. The rules currently applicable to provident funds will remain applicable to all fund credit values in provident funds built up to 1 March 2016. The new law will only be applicable to fund values built up after 1 March 2016. Mr Muneer Hassan, UJ expert and Lecturer in Taxation, recently outlined the way in which the new retirement reforms affect the average South African when he spoke to SAfm and PowerFM.
In addition it must be noted that should a members total fund value, subject to the new legislation for provident funds or the total pension fund value be less than R 247 500 at the time of his/her retirement, legislation allows for the benefit to be paid out in full in cash.
To clarify, there are three types of retirement funds in South Africa – Pension Funds, Provident Funds (pension and provident funds are employer funds) and Retirement Annuity Funds (individuals typically participate in a retirement annuity fund in their personal capacity). The differences between the funds currently are as follows:
| Pension Funds
(like the UJ Pension Fund) |
Provident Funds | Retirement Annuity Funds | |
| Tax on contributions | Your contribution is deducted from your salary and then your salary is taxed. You therefore receive a monthly tax advantage. | The member’s salary is taxed and then the member’s contribution is paid to the fund – these contributions will not be taxed again if the member receives a payment from the fund in the case of withdrawal or retirement. | The contributions to the fund are tax deductible up to a maximum of 15% of non-pensionable taxable income. If you contribute more, you may claim excess amounts in future tax years. |
| What happens on retirement? | You can take up to 1/3 of your benefit in cash but the rest you have to use to purchase a monthly pension. | These members can take the entire fund credit in cash or purchase a monthly pension. | You can take up to 1/3 of your benefit in cash but the rest you have to use to purchase a monthly pension. |
From 1 March 2016 the following changes will be made:
| Pension Funds
(like the UJ Pension Fund) |
Provident Funds | Retirement Annuity Funds | |
| Tax on contributions | From 1 March 2016 you may deduct up to 27,5% of your gross remuneration or taxable income (whichever is the higher) in respect of your total (employee and employer contributions to a pension, provident and / or retirement annuity fund), subject to an annual limit of R350,000. Your employer contributions will also be included in your taxable income but the fringe benefit tax will be offset against the tax deductibility of your total contribution. | ||
| What happens on retirement? | You can take up to 1/3 of your benefit in cash but the rest you have to use to purchase a monthly pension (no change). | You can take up to 1/3 of your benefit in cash but the rest you have to use to purchase a monthly pension.
Important notes:
|
You can take up to 1/3 of your benefit in cash but the rest you have to use to purchase a monthly pension (no change). |
The new legislation now also allows members to transfer from a pension fund to a provident fund without incurring any tax liabilities. It is therefore only amounts taken in cash which will be subject to tax. The current tax tables are as follows as per the 2015 SARS pocket guide:
In case of resignation / dismissal benefits:
| Taxable Income (R) | Rate of Tax (R) |
| 0 – 25 000 | 0% of taxable income |
| 25 001 – 660 000 | 18% of taxable income above 25 000 |
| 660 001 – 990 000 | 114 300 + 27% of taxable income above 660 000 |
| 990 001 and above | 203 400 + 36% of taxable income above 990 000 |
In case of Retirement, death or redundancy:
| Taxable Income (R) | Rate of Tax (R) |
| 0 – 500 000 | 0% of taxable income |
| 500 001 – 700 000 | 18% of taxable income above 500 000 |
| 700 001 – 1 050 000 | 36 000 + 27% of taxable income above 700 000 |
| 1 050 001 and above | 130 500 + 36% of taxable income above 1 050 000 |
It is also important to note that the tax free amounts apply in aggregate – these amounts are only granted once to the taxpayer.