Yesterday marked what has become known as T-day – the day the long awaited tax reforms became a reality in the retirement industry and for retirement fund members.
Essentially, the amendments will facilitate better tax alignment across pension, provident or retirement annuity funds. However, Romeo Msipha, Senior Consultant of Old Mutual Corporate Consultants, says there has been some uncertainty among retirement fund members about exactly how their retirement savings will be impacted by these new rules.
Initially the amendments were going to introduce tax harmonisation and the annuitisation of retirement funds over a specific amount. However, it was announced in the 2016 Budget Speech that the Revenue Laws Amendment Bill 2016 will give effect to the decision by Government to postpone the annuitisation requirement for provident and provident preservation fund members by a further two years.
Msipha says that the changes have caused some confusion among members, and stresses it is important for members to understand if and how they will be affected. Here are the key elements of the new rules:
What rules are effective as of 1 March 2016?
Pension, provident or retirement annuity funds previously had different tax deduction allowances. As of 1 March 2016, members of all approved funds (pension, provident and retirement annuity funds) qualify for a contribution deduction of 27.5% of the greater of their taxable income or the total remuneration that they receive from their employer. A member can contribute the total amount into a single fund or a combination of funds (e.g. some into a provident fund and the rest into a retirement annuity fund).
This tax deduction is now capped at R350 000 per year, which means only a person with taxable income or remuneration exceeding R1 272 727 per year will reach this maximum. Contributions not claimed for the year can be rolled over and claimed in the next year.
For pension, pension preservation and retirement annuity fund members, the amount of money allowed to be taken as cash at retirement (known as the ‘de minimis for annuitisation’) has increased from R75 000 to R247 500. This means that if a member’s savings in the pension fund at retirement is R247 500 or less, the member can take the entire retirement benefit in cash. However, if their retirement interest in the fund at retirement is for example R270 000, then the member must use two thirds (R180 000) to purchase an annuity and may only access the balance (R90 000) in cash. This annuity rule is not new for pension, pension preservation and retirement annuity fund members as they were already required to purchase an annuity at retirement age, provided their savings were above the ‘de minimis’ amount.
The annuitisation rules for provident and provident preservation fund members has been postponed to March 2018 but what does this mean?
Annuitisation refers to purchasing a pension (known as an annuity) at retirement with two-thirds of retirement savings, provided the savings are above the ‘de minimis’ amount.
An annuity is intended to secure a regular income for the fund member after retirement for the rest of his or her life. There are various options available and members are able to choose the type of annuity and the provider when they retire (depending on the rules of the fund to which they belong).
Before the introduction of the tax law amendments, members of pension, pension preservation and retirement annuity funds were already required to receive two-thirds of their retirement savings at retirement in the form of annuity payments. The original annuitisation requirement component of these reforms would have required certain provident and provident preservation fund members, depending on their retirement savings amount and other factors, to also have to purchase a pension (annuity) at retirement. This has however been postponed to March 2018.
What are the changes that took place on 1 March 2016?
The tax law amendments will impact individuals differently, depending on their personal situation and circumstances. The immediate impact can affect members in one of the following ways:
- Members contributing more than R350 000 per annum will pay more tax.
- Provident fund members contributing less than R350 000 will, for the first time, enjoy tax deductibility on their own contributions from 1 March 2016, which means that their take-home pay could potentially rise.
- The level above which pension fund and retirement annuity fund members are required to use at least two-thirds of their benefit to purchase an annuity (known as the ‘de minimis’ amount) has increased from R75 000 to R247 500.
What is the difference between how my retirement benefits are treated before and after 1 March 2016?
Pension fund members:
- Tax deductibility of member contributions is up from 7.5% of pensionable earnings for pension fund members, to 27.5% of the greater of their taxable income or the total remuneration received from their employer. This is subject to a yearly maximum of R350 000.
- Pension fund members are already required to receive two-thirds of their retirement savings at retirement in the form of annuity payments and this does not change.
- The only thing that has changed is the annuitisation threshold below which annuitisation is not required. This is known as the ‘de minimis for annuitisation’ and it has increased from R75 000 to R247 500. Therefore, if members have less than R247 500 in retirement savings when they retire they can take the whole amount in cash.
Provident fund members:
Before 1 March 2016, member contributions were not tax deductible (however employers could deduct employer contributions from the employer tax). Now, from 1 March 2016, provident fund member contributions are tax deductible and a member can contribute up 27.5% of their taxable income or total remuneration from their employer (whichever is the greater), subject to a yearly maximum of R350 000.
Retirement annuity (RA) fund members:
Previously there was a tax deductibility of 15% of non-pensionable earnings for retirement annuity fund members. A member may now contribute 27.5% of the greater of taxable income or the total earnings from their employer into their pension, provident and RA funds. This is subject to a yearly maximum of R350 000.
Msipha urges members to learn how the new tax law amendments impact their own retirement savings and how they can maximise their savings for a more financially secure future. Increasing contributions to their retirement fund is one example.