A retirement annuity (RA) is a voluntary pension plan in which individuals can contribute in a tax-efficient manner to provide for their retirement years. Unlike pension and provident funds which are occupational in nature, RAs are private and, as such, an employee/employer relationship is not necessary for membership. Subject to a few exceptions, the earliest a member can retire from an RA is age 55, with no upper age limit for retirement, at which point they are required to use at least two-thirds of the fund to purchase an annuity income. But what happens if the member dies before retiring from the RA? How are the funds distributed and to whom?
Authors: Joon Chong, Partner &Wesley Grimm, Associate at Webber Wentzel. The National Treasury published the Draft Taxation Laws Amendment Bill, 2020 (Draft Tax Bill) for public comment. One of the more contentious proposals in the Draft Tax Bill relates to the ability of people emigrating from South Africa to access amounts in their pension preservation fund, provident preservation fund and retirement annuity fund (retirement funds) when they leave. In accordance with the policy decision to phase out “financial emigration” for exchange control purposes, which was announced in the 2020 Budget Speech, National Treasury and the South African Revenue Service (SARS) have proposed to amend the definitions of the terms “pension preservation fund”, “provident preservation fund” and “retirement annuity fund”.
When the legislature introduced a fifth fund to the already burdensome four fund approach to the Long-Term Insurance legislation in 2016, many wearied tax managers and practitioners shoulders slumped further. On closer investigation the introduction of the fifth fund, or Risk Policyholder Fund (RPF), brought apparent administrative relief to many, as most of their policies could be lumped into this one fund leaving them with two funds, together with the ever present Corporate Fund, instead of four or a dreaded five to administer.
What is it? Tax Free Investments were introduced as an incentive to encourage household savings. This incentive is available from 1 March 2015. How will it work? The tax free investments may only be provided by a licenced bank, long-term insurers, a manager of registered collective schemes (with certain exceptions), the National Government, a mutual bank and a co-operative bank. Service providers must be designated by the Minister in the Gazette. As per the current Regulation, only the above are designated.
The tax treatment of retirement funding will change with effect 1 March 2016. These changes were already promulgated into law. The changes intended to (i) harmonise the tax treatment of the various retirement funding vehicles used in South Africa, and (ii) increase savings towards the protection of retirement funding for post-retirement through forced annuitisation in respect of provident fund contributors. Provident fund members were, in terms of the new legislation, required to in future apply two-thirds of the fund benefit to acquire an annuity on retirement. Retirement funds with values less than R247 500 (up from R75 000) were not required to be annuitised.
Author: Linda Ensor (BDlive). The government has once again caved in to trade union pressure by agreeing to a two-year delay in the introduction of the compulsory annuitisation of two-thirds of provident fund savings on retirement. This is the second time that the Treasury has unsuccessfully tried to implement the provision and then backtracked in the face of strong opposition from the Congress of South African Trade Unions (Cosatu). The proposed postponement was tabled by Finance Minister Pravin Gordhan at an urgent meeting on Monday with the social partners of the National Economic Development and Labour Council.
Author: Liesl Peyper (News24). Cape Town – When President Jacob Zuma signed the Taxation Laws Amendment Act late last year he wasn’t aware of Cosatu’s objections with regard to the proposed annuitisation of provident fund benefits. “The concerns were only brought to the President’s attention after he had signed the bill,” said Minister in the Presidency Jeff Radebe. At a post-cabinet briefing on Thursday morning Radebe had to field a barrage of questions from journalists about the postponement of the provident fund rules in the legislation.
Author: Liesl Peyper (News 24). Cape Town – For the second year in a row President Jacob Zuma’s government has been forced to backpedal on provisions in the Tax Amendment Act that compel South Africans to put two-thirds of their provident fund savings in a retirement annuity. The provision meant that retirees would be allowed to take only one-third in cash, while they are currently entitled to the full amount. Business Day reported that Finance Minister Pravin Gordhan tabled a proposed postponement at a meeting on Monday with the representatives of the National Economic Development and Labour Council.
Author: Ingé Lamprecht (Moneyweb). Tax deductible contributions to retirement funds to be capped at R350 000 from March 1. JOHANNESBURG – The tax harmonisation of retirement funds will also see the introduction of a cap of R350 000 per annum on deductible contributions to pension funds, provident funds and retirement annuities on March 1. This means that a number of high net worth individuals (HNWIs) who previously contributed in excess of R350 000 to retirement vehicles and who were able to deduct the full contribution from their taxable income, will now see the deductible portion of their contribution capped at R350 000. As a result, their take-home pay will reduce.
The date of implementation of new rules relating to the tax treatment of contributions to retirement funds, which were expected to take effect on 1 March 2015, was postponed until 1 March 2016, in terms of the Taxation Laws Amendment Act of 2014. Among other changes, the new rules will affect the employees’ tax implications of employer contributions to retirement funds, and the deductibility for income tax purposes by the member of such contributions, thus affecting both participating employers and members. In addition, depending on the nature of the benefits available to members, the retirement fund may be obliged to provide information to the participating employer in respect of contributions for specific categories of fund members. The implications of some of these changes are highlighted below.