Retirement reform still in progress

By Janice Roberts

By David Gluckman, Head: Special Projects at Sanlam Employee Benefits, with contributions from Sanlam Employee Benefits’: Anton Swanepoel, Danie van Zyl, Kobus Hanekom, Carien Veenstra, Mayuri Reddy, Freddy Mwabi, Ryan Campbell-Harris

In the 2015 budget speech, the Minister of Finance made a number of proposals that are relevant to the employee benefits industry.

Retirement reform still in progress

Government intends to improve market conduct for the retirement industry. To this end Government will continue to build on its retirement reform initiative, which aims to facilitate an environment in which all employees can retire comfortably and not face poverty in their old age. The reforms will:

• Encourage preservation before retirement and annuitising at retirement

• Improve governance and disclosure of retirement funds

• Reduce costs, which includes greater use of passive funds

• Harmonise regulation and supervision between private and public retirement funds

• Design a uniform tax and contribution system.

T-Day (and P-Day) still on the negotiations table

As noted in the 2014 Budget, government is committed to engaging with key stakeholders (trade unions, trustees, employers and industry) directly and through the National Economic Development and Labour Council (NEDLAC), to finalise the legislative framework for retirement reform.

We agree that these reforms are urgent, and that delays will be at the cost of members and pensioners.

Social security reform – framework for consultation being developed

The policy measures outlined in the Budget seek to address critical shortcomings in the current system. Over the past three years, government released several technical papers on retirement reforms, and various policy reforms have been legislated. These reforms are expected to be largely consistent with further progress on social security reform, which is expected to take longer given its complexity. The social security reform process will be initiated after Cabinet has approved a framework for consultation with key stakeholders.

Default benefit strategies: Regulations due in 2015

The 2014 Budget announced that draft regulations on default preservation, investment strategy and annuities would be released for public comment in 2014. Drafting the regulations has taken longer than expected due to their complexity, and they are now projected to be released early in 2015.

Mandatory pension system under consideration

The 2014 Budget announced that Government would consider a mandatory contribution system and a retirement system to help vulnerable workers save for their retirement. Government will discuss these initiatives with key stakeholders during this year to ensure that a cost-effective and suitable retirement system is designed for this group of workers – or, at minimum, that a cost-effective default is established.

Phased Retirement: maximum age introduced

From 1 March 2015, a retirement fund member may defer the drawing of their retirement income until after their retirement date. This will provide greater flexibility for retirement fund members and encourage the preservation of retirement assets. However, to limit tax planning opportunities, it is proposed that a maximum age at which withdrawals must be taken is to be introduced. This is in line with other countries that have similar retirement funding arrangements.

Personal Income Tax

Personal income tax rates will be raised by one percentage point for all taxpayers earning more than R181 900 a year. This raises tax by R21 a month for a taxpayer below age 65 with an annual income of R200 000. Those earning R500 000 would pay R271 a month more, and at R1.5 million a year the tax increase is R1 105 a month. However, tax brackets, rebates and medical scheme contribution credits will be adjusted for inflation, as in previous years. The net effect is that there will be tax relief below about R450 000 a year, while those with higher incomes will pay more in tax.

The primary rebate for individuals will be increased from R12 726 to R13 257 and the secondary rebate (for 65s and older) from R7 110 to R7 407. The third rebate for those older than 75 has been increased from R2 367 to R2 466.

Income tax thresholds have been raised from R70 700 to R73 650 for those below age 65 and from R110 200 to R114 800 for those aged 65 and older. For those aged 75 and older, the threshold will increase from R123 350 to R128 500.

To provide relief for inflation-related earnings increases (fiscal drag), all income tax brackets and rebates will be increased by 4.2 per cent.

Regrettably, the tax tables for retirement fund lump sum benefits have not been adjusted for inflation this year. Similarly, the interest exemption has not been increased because of the introduction of the tax free savings vehicles with effect from 1 March 2015.

Medical Scheme Contributions

Monthly medical scheme contribution tax credits will, from 1 March 2015, increase from R257 to R270 per month for the first two beneficiaries and from R172 to R181 per month for each additional beneficiary.

Employees over 65 are experiencing a decrease in their take-home pay as a result of the move to medical tax credits, although they may claim back some of these amounts on assessment after the end of the tax year. To alleviate this burden, it is proposed that medical tax credits related to medical scheme contributions be taken into account for both PAYE and provisional tax purposes.

Social grants

The old age grants, war veterans, disability and care dependency grants will increase by R60 from R1 350 to R1 410 per month. Child support grants increase from R320 to R330 per month. There is a possibility of further adjustments to these values in October.

UIF contribution relief

A one-year relief measure in respect of Unemployment Insurance Fund (UIF) contributions was introduced since the UIF has an accumulated surplus of over R90 billion. Improved benefits are now being introduced, but it is nonetheless possible to provide temporary relief to both employers and employees.

The proposal is that the contribution threshold should be reduced to R1 000 a month for the 2015/16 year. This means that employers and employees will each pay R10 a month during the year ahead, putting R15 billion back into the pockets of workers and businesses.

Withdrawal from retirement annuity funds by non-residents

Non-residents who move to South Africa for a fixed term of employment often contribute to a retirement annuity fund to continue saving for retirement in a tax-efficient manner. The current definition of “retirement annuity fund” does not allow these individuals to withdraw the amounts they have saved over this fixed term if they return to their home countries. In contrast, if South Africans emigrate, they are allowed to withdraw their retirement annuity interest. The mismatch in treatment will be reviewed.

Estate duty

Amendments in 2008 removed the upper age limit at which an individual was required to purchase an annuity if they had an interest in a retirement annuity fund, and excluded retirement fund benefits from the dutiable estate when a member passed away. These two amendments have made it possible for some individuals to avoid estate duty by transferring their assets into a retirement annuity fund before their death.

In the deceased’s tax calculation, lump sums paid to the estate are subject to the lump sum retirement taxable. However, lump sums equal to amounts above the allowable deduction (nondeductible contributions) are not subject to the lump sum tax table or estate duty. To eliminate the potential to avoid estate duty, government proposes that an amount equal to the non-deductible contributions to retirement funds be included in the dutiable estate when a retirement fund member passes away.


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