HOW RETIREMENT FUND CHANGES AFFECT YOUR MEMBERS

Alexander Forbes Member Watch analysis shows that about 50% of members retire with less than one-fifth of their final salary to live on in retirement. The reality is that although the South African retirement system has many good features, there are a few issues to address:

Protect members in some way against poverty.

Make sure that members contribute enough towards their retirement fund to keep their standard of living in retirement.

Ensure that the retirement system offers value for money.

One of the aims of retirement reform is to create a uniform retirement fund system for all types of retirement

savings vehicles, such as pension, provident and retirement annuity funds. This will allow all members to receive the same tax treatment of the money contributed and how benefits can be paid at retirement. Because pension, provident and retirement annuity funds are currently treated differently, a uniform system would make these simpler to understand.

Many reforms have been implemented over the last few years, but it’s been a long journey for this next vital step. The changes are beneficial for most retirement fund members and encourage greater savings for retirement and address issues in the retirement system.

Why is retirement reform important?

How retirement reform impacts your members

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The retirement benefit changes for provident fund members were originally scheduled for 1 March 2015.

After several postponements, these changes will take place on 1 March 2021 according to the Taxation Laws Amendment Act.

Dolana Conco

Regional Executive, Consultants & Actuaries

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Retirement Reform Update

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HOW RETIREMENT FUND CHANGES AFFECT YOUR MEMBERS

Before 2016, contributions to provident funds and pension funds were treated differently for tax purposes.

Contributions to all retirement funds have had the same tax treatment since 1 March 2016:

Employer contributions are included in the taxable income of employees as a fringe benefit.

Employees’ tax deductibility of contributions is limited to 27.5% of the greater of remuneration or taxable income, up to a yearly limit of R350 000. This is an overall tax-deductible limit that will apply to all retirement funds you contribute to (pension, provident and retirement annuity funds).

Both the employee and employer contributions form part of the tax-deductible limit.

Taxpayers can roll over any contributions over 27.5% or R350 000 into future tax years. This can be claimed on assessment up to annual tax-deductible limits.

These changes benefited provident fund members as they could contribute more to boost retirement savings tax efficiently.

Unfortunately, the R350 000 limit does impact high earners. Members who have a pensionable salary of more than R1.2 million and contribute 27.5% are limited by the R350 000 for tax-deductibility purposes. Therefore, any contribution over the R350 000 is not tax efficient, but this doesn’t mean that these members shouldn’t continue to contribute above this amount, as there are many other benefits of saving in a retirement fund.

These savings will be protected from creditors, they are also usually cheaper to administer and invest than typical discretionary investments and are free from dividends tax, capital gains tax and estate duty. The only exception with estate duty is that it will apply to any amount contributed to an approved fund, which did not qualify for a tax deduction, unless the beneficiaries buy a compulsory annuity (including a living annuity) with contributions that did not qualify for exemption or deduction. Personal circumstances may differ, and these members could benefit by planning their affairs using an accredited financial adviser.

Tax changes to contributions that were implemented in 2016

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FOREXAMPLE

A reminder

HOW RETIREMENT FUND CHANGES AFFECT YOUR MEMBERS

Buying a pension at retirement

Currently provident fund members can take their retirement benefit as a full cash lump sum and don’t have to buy a pension (annuity) from a registered insurer when they retire. However, pension fund members must use at least two-thirds of their retirement benefit to buy a pension, unless the total benefit is less than R247 500.

From 1 March 2021 retirement benefits from provident funds will be treated in the same way as pension funds for the part of the benefit based on contributions from 1 March 2021. The changes for provident fund members are:

Provident funds will have the same annuitisation rules as pension funds. This means that members will have to buy a pension (annuity) from a registered insurer with at least two-thirds of their retirement benefit, unless the total benefit is R247 500 or less.

However, vested rights – ring-fencing of retirement savings before the new legislation takes effect – will be applied in the following way:

Any provident fund balance saved before 1 March 2021 plus the future growth on this until retirement won’t be affected and can be accessed in cash on retirement.

Members who are 55 years or older on 1 March 2021 will not be affected by this change at all if they stay a member of the same provident fund (or provident preservation fund, as proposed in the draft Taxation Laws Amendment Bill (TLAB) 2020) until retirement. This means that the retirement benefit will be treated in the same way as it is currently being treated when these members retire. If these members transfer to another fund, they will still have vested rights, but contributions and growth on this to the new fund will require two-thirds annuitisation.

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Retirement benefit changes from 1 March 2021

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The draft TLAB includes an intention for the vested rights of members who are age 55 or older and who are members of a provident or provident preservation fund on 1 March 2021 to be retained when transferring to other funds. The draft TLAB needs to be refined to give effect to this and the industry is engaging with National Treasury on the matter. We are hoping that this issue will be resolved in the Taxation Laws Amendment Act following the draft TLAB.

+55 years

HOW RETIREMENT FUND CHANGES AFFECT YOUR MEMBERS

Retirement benefit changes from 1 March 2021

Vested rights ring-fence your savings and interest before the new law applies

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Practical examples of how the vested rights will work (note that these examples exclude the implications of a transfer involving members who are 55 or older on 1 March 2021).

Your savings balance on 1 March 2021 and future growth on that balance will not be affected and you can take it out

in full when you retire.

Note: Any amounts taken in cash will be subject to tax.

HOW RETIREMENT FUND CHANGES AFFECT YOUR MEMBERS

Tax-free transfers between retirement funds

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Employers who have multiple retirement funds may want to consider consolidation of these funds, as pension funds, provident funds and retirement annuity funds will be harmonised in the tax treatment of contributions and the retirements benefits at the time of retirement.

Consolidation requires many other factors to be considered. One such example is understanding the

To conclude, the changes to ensure further harmonisation between pension funds, provident funds and retirement annuity funds take effect on 1 March 2021. It is important for trustees to start implementing project plans to get ready for these changes. Amendments to rules, communication to members, and fund consolidation will be some of the matters to consider.

implications on vested rights when transferring provident fund members who are 55 or older on 1 March 2021.

Other factors will also include the size of the funds, potential cost savings or cost implications, Section 14 transfer requirements, deregistration or liquidation requirements of the transferor fund and so on.

= TAX FREEFROM 1 MARCH 2021

TRANSFERSFROM TO

Pension funds

Pension preservation funds

Provident fund

Provident preservation funds

Pension funds

Pension preservation funds

Provident fund

Provident preservation funds

Retirement annuity fund

The benefit of this change is that funds will be able to transfer members’ savings tax efficiently.

This information is not advice nor is it intended as a personal recommendation, guidance or a proposal on the suitability of any financial product or course of action as defined in the Financial Advisory and Intermediary Services (FAIS) Act. While care has been taken to present correct information, Alexander Forbes and its directors, officers and employees take no responsibility for any actions taken based on this information, all of which require financial advice. The information in this document belongs to Alexander Forbes. You may not copy, distribute or modify any part of this document without the express written permission of Alexander Forbes.

Alexander Forbes Financial Services is a registered financial services provider (FSP 1177). Credits: Alexander Forbes Communications (production) | Getty Images (imagery)

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