T-Day legislation set for 1st March 2017
After initially facing opposition from the Congress of South African Trade Unions (COSATU), the National Council of Provinces voted (On 1st December 2015) in favour of Option 1 of the Taxation Laws Amendment Bill 2015 without amendments. The bill also known as the T-Day legislation makes a number of amendments to the legal and taxation aspects of retirement funds and aims to ensure that the plight of South African pensioners is significantly improved. According to Sanlams BENCHMARK research, currently two thirds of South Africans are unable to maintain their standard of living into retirement.
When passed by the President and signed into law, the retirement reforms would help protect pensioners against old-age poverty.
Kobus Hanekom, head of strategy, governance and compliance at Simeka Consultants and Actuaries believes that, although there are no guarantees, there is a very strong possibility the law will be passed without further changes. Given the strong opposition to the new legislation by COSATU, National Treasury is likely to undertake a review of the new law, which would include further consultations within two years of its implementation and also undertake an extensive educational campaign.
Hanekom offers some insight into the changes the bill will effect:
Option 1 explained
Option 1 is the implementation of the original Taxation Laws Amendment Act of 2013 (which in terms of the current Income Tax Act will apply from 1st March 2016) with the exception that the minimum amount (that members may withdraw as a lump sum) will increase from R150 000 to R247 500. This effectively means that a retirement benefit payable by any pension, provident or retirement annuity fund after T-Day and does not exceed the minimum amount, can be taken as a cash lump sum.
T-Day will have two significant implications for retirement fund members:
It will harmonise the tax deductibility of retirement fund contributions; and,
It will change provident funds benefit structures into pension fund benefit structures (also referred to as compulsory annuitisation) – subject to the protection of vested rights.
T-Day is good news for most members because they will be able to make greater tax deductible contributions to retirement funds and they will effectively enjoy contribution flexibility for the first time, maintains Hanekom.
Come 1st March 2016 members who discover that their retirement savings are insufficient and are not in a position to increase their contributions currently, will be able to increase them and will enjoy a tax deduction up to the new threshold. This is on the assumption that the fund rules allow additional voluntary contributions. At present, tax legislation does not allow for increased contributions (over and above the 7.5% contribution to a pension fund) outside of a total cost to company remuneration approach.
Impact on members earning more than R1 300 000 per annum
For fund members who earn more than R1 300 000 p/a, T-Day will unfortunately not be good news. These members will be entitled to a tax deduction on contributions of up to 27.5% of their remuneration or their taxable income, whichever is the greater, but subject to a rand cap of R350 000 p/a. This is the cumulative maximum for all retirement fund contributions.
Higher income earners will therefore have to combine their contributions, including those to retirement annuity funds and decide on a strategy going forward. Hanekom notes that there are alternatives, but none as effective as making deductible contributions to a retirement fund. Retirement funds are very tax efficient and cost efficient especially the larger occupational retirement funds that benefit from economies of scale and you will not find a better investment vehicle in South Africa.
Impact on Provident fund members
Provident fund members will not be affected by compulsory annuitisation immediately. All new contributions will effectively be paid into a pension fund type benefit structure, but vested rights (the amount of the retirement benefit that may be taken in a lump sum) will be protected, says Hanekom.
Whatever the members retirement benefit in a provident fund is at the end of February 2016, it will be protected. Even in instances where a member retires many years after T-Day, he or she will be able to take that amount and the growth thereon, as a lump sum benefit. It will take the average fund member (earning R10 000 pm and contributing 15% pa) seven years for new contributions and growth thereon to reach the minimum amount of R247 500. Members aged 55 and older on T-Day will not be affected if they remain in the same provident fund.
The Government has taken great care in the introduction of compulsory annuitisation so as to safeguard provident fund members. No vested rights will be affected and the new regime will effectively be phased in over a good number of years, says Hanekom.
Impact on the employer
Employers need to make sure that their payroll service provider can make all the necessary structural adjustments to the payroll and the salary advice. Such adjustments need to show that employer contributions to retirement funds will be taxed as fringe benefits in the hands of employees. Employees on the other hand will enjoy increased tax deductibility up to 27.5%.
Hanekom believes that the contribution flexibility is arguably the most important development. At present many members are not able to increase their deductible contributions but from T-Day next year, it will be the first time where they are actively able to manage their contributions and ensure a good retirement outcome.
Trustees of provident funds in particular will have to attend to the necessary rule amendments and adjustments to both forms and procedures. In addition to this, the implications – and the opportunities created by the T-Day amendments should be communicated with members and efforts made to ensure that the changes in legislation are well understood.
Insurance Times / Retirement
7 January 2016