Feb 2016 2nd Edition

Government’s new retirement reforms

The new retirement reforms aim to help South Africans to protect their retirement savings. Here's more information:

Why did government pursue these reforms in the first place?

The reforms seek to protect retirees from old age poverty by encouraging them to save for retirement. They also seek to simplify the current system and make products more transparent.
What are the changes that will come into effect on 1 March 2016?

The Taxation Laws Amendment Act of 2013 and 2015 will  come into effect on 1 March 2016. These laws allow members of retirement funds to reduce the tax they pay by being able to deduct contributions into retirement funds up to 27.5 per cent (up to a maximum of R350 000) per annum, as a percentage of their income. The new laws also increase the amount required for annuitisation at retirement from R75 000 to R247 500 (called “de minimis”).  

What is the problem with the current system which the law is trying to fix?

Currently, different types of retirement funds provide different tax benefits. For example, retirement annuities allow a tax deduction benefit only up to 15 per cent, provident funds up to 20 per cent, and pension funds up to 27.5 per cent. Secondly, provident fund members don’t get a tax deduction for their own contributions, while pension fund members do. Pension and retirement annuities require a portion (i.e. 2/3rd) of the benefit to be paid as a regular income, while provident funds allow a retiree to take the entire benefit as a cash lump sum when they retire.

How will the new law harmonise this difference in tax treatment and benefits?

The main changes will apply to provident funds. Provident fund members will now receive one-third (1/3rd) of their retirement benefit as a lump sum at retirement and the remaining two-thirds (2/3rd) has to be annuitised. For example, if the entire retirement benefit amounts to R300 000, an amount of R100 000 (i.e. 1/3) may be taken as a lump sum and R200 000 (i.e. 2/3) would have to be annuitised. This change will ONLY apply to contributions that are made after 1 March 2016. Provident funds members will also get a tax deduction for their contributions.

What does annuitisation mean?

Annuitisation means taking a portion of your retirement benefit in small monthly payments, rather than getting it all as one cash lump sum.

What will be the new treatment of provident funds in terms of tax?

Members of provident funds will now be able to claim a tax deduction on their contributions to their funds for the first time. Secondly, the contributions their employers make to their provident funds will become visible on their payslips.  Thirdly, many fund members who make contributions to their provident funds will see their take-home pay increase slightly. Fourthly, all new contributions (and growth on them) into provident funds after 1 March 2016 by those younger than 55 years will be subject to the annuitisation requirement once the value is over R247 500 (i.e. the de minimis threshold). All provident fund members will still be able to take all their retirement savings, and growth on them, that would have been accumulated up to 1 March 2016, as a cash lump sum when they go into retirement.

At what age will I be affected by the law?

Members of provident funds who are 55 years old on 1 March 2016 will NOT be affected by the new laws if they elect not to change funds. Only contributions after 1 March 2016 (i.e. new contributions) made by provident fund members who are BELOW 55 years old on 1 March 2016, and only if these new contributions are above R247 500, will be affected.

How does this new law apply to those that change jobs?

The new law does NOT apply if you change jobs. Members of a provident or/and pension fund will still be able to change jobs and withdraw all their retirement money.  Although government encourages people preserve their savings rather than cash out every time they change jobs.

How will the new law apply to the Government Employees Pension Fund (GEPF)?

The GEPF will not be affected by these reforms as they already pay a gratuity (lump sum cash) and a pension (annuity) for members with more than 10 years of service. But in terms of tax, GEPF members will be subject to the same tax deductibility limits on retirement contributions contained in the above tax legislation.

Why is Government telling us how to access our retirement money?

The law is about helping people to be better prepared for the future by saving for retirement and receiving income in smaller regular amounts when in retirement. This regular income protects retirees from quickly spending the entire money and having to excessively rely on relatives and government. Research shows that less than 10 per cent of working South Africans are able to retire comfortably and maintain a decent standard of living in retirement.

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