Pravin’s big retirement changes on track

You need to gear up your retirement planning to meet T-Day and P-Day, when government will implement major changes to the R3-trillion retirement savings industry.

T-Day and P-Day are days when  retirement fund reforms are scheduled to be implemented in or after  2015, with legislation based on government’s latest proposals for  retirement reform being put before Parliament this year. The proposals  are outlined in a discussion paper titled “2013 Retirement reform  proposals for further consultations”.

This latest discussion document,  released this week with the Budget, consolidates reaction to four  discussion documents published last year on various aspects of  retirement reform, including the preservation and taxation of retirement  savings.

Apart from T-Day and P-Day, a  number of other reforms will be implemented to boost the protection of  your retirement savings, including the enforcement of better behaviour  by your retirement fund trustees and measures aimed at reducing costs.  The reforms also propose to bring statutory funds, such as the  Government Employees Pension Fund and the Transnet funds, under the  ambit of the Pension Funds Act, giving members the rights enjoyed by  members of non-statutory pension funds.

T-Day

The recommendations for the  still-to-be-set T-Day will affect the taxation of your retirement fund  contributions. The recommendations change those made last year by  Finance Minister Pravin Gordhan, which were scheduled for implementation  on March 1, 2014. The latest recommendations are:

* Your employer’s contributions will be added to your taxable income as a fringe benefit;

* You will be able to deduct both  your and your employer’s contributions to a pension fund, provident fund  or retirement annuity (RA) fund up to 27.5 percent of the greater of  remuneration or taxable income;

* The premiums you pay on group risk insurance will be included in the amount you may deduct from your taxable income;

* There will be a rand cap of R350 000 on the total amount you may deduct from your taxable earnings in any tax year;

* Contributions in excess of the annual cap may be rolled over to future years when you may not reach the cap amount;

* Any non-deductible contributions will be added to your tax-free lump sum at retirement; and

* From  T-Day, any new contributions made to a provident fund will be subject to  the same annuitisation rules as pension funds, namely that at least  two-thirds of the savings must be used to purchase a pension at  retirement. Any provident fund savings made before T-day, and any  investment growth on those savings, will not be subject to the new  pension purchase requirement.

P-Day

Government is proposing tighter  controls on preserving retirement savings, but it will allow you to  access savings before retirement during periods of unemployment.

However, vested rights will be protected to avoid a repeat performance of people resigning their jobs or getting divorced to get their hands of their retirement savings.

Recommendations for the preservation of retirement savings are:

* From P-Day, all retirement funds  will be required to identify a default preservation fund to which  members’ savings can be transferred if they withdraw from the fund  before retirement. The use of an existing retirement fund to preserve  savings for retirement is already a no-cost option for members who, if  the fund rules allow, can stay on as deferred members with their savings  protected and growing until normal retirement age. However, currently,  no withdrawals are allowed. This will change with the new withdrawal  rules.

*  Currently, you are limited to one withdrawal from a preservation fund  before retirement, but the withdrawal may be 100 percent of your  savings. The new proposal is to allow for an income stream in periods of unemployment, allowing for one withdrawal a year.

* Withdrawals will be based on a  formula. The proposed annual withdrawal will allow members of  preservation funds to withdraw an amount that is the greater of the  state old age grant (R1 260 from April 1) or 10 percent of their initial  preservation fund deposit, excluding any portion to which vested rights  apply. Any unused withdrawal amounts may be carried forward to future  years.

* From P-Day, retirement fund  divorce settlements will be subject to the proposed new preservation  withdrawal rules allowing for a limited income stream.

Consideration is also being given  to relaxing the preservation requirements of RA funds, from which you  currently cannot make any withdrawals before the age of 55. (When you do  reach 55, two-thirds must be used to purchase a pension).

Treasury is considering allowing  RA fund members to transfer their balances to preservation funds, under  conditions that will prevent them from seeking out additional tax  advantages. The conditions may include preventing individuals who have  transferred money out of an RA fund from rejoining that fund, or,  alternatively, from receiving a tax deduction in respect of any RA  contributions, for a period.

TREASURY INTENT ON OVERHAUL OF LIVING ANNUITIES

Investment-linked  living annuities (illas) are due for a major overhaul to ensure that  pensioners using them are not left financially destitute before they die  because of high costs, poor advice, wrong investment choices and   drawdown rates that are too high.

Life assurance companies are set  to lose their stranglehold on the provision of illas, with government  proposing that the requirement of a life assurance licence to sell illas  be dropped.

It is proposed that collective  investment scheme management companies such as unit trust and exchange  traded fund companies be allowed to sell illas without, as they  currently need to do, registering as a life assurance company or renting  a life assurance licence.

National Treasury hopes this will increase competition and bring down costs.

It says most respondents to an  earlier discussion paper pointed out that an important factor underlying  the choice of annuity at retirement was that people with a low level of  savings tended to choose illas in the hope that, because they allow for  higher initial pension payments than conventional annuities, they could  maintain their living standards.

Most respondents were in favour of reforming, rather than replacing illas.

Treasury says:

* Many of the difficulties  associated with illas may be direct or indirect consequences of the ways  in which intermediaries, including investment platforms, are paid. The  Financial Services Board (FSB) is already investigating these costs as  part of its Retail Distribution Review on commissions paid for financial  products, including illas. This review will include an investigation  into the payment of rebates by collective investment schemes to  linked-investment service providers, which are currently the main source  of illas.

Illas are also part of the scope of the Treating Customers Fairly initiative.

* Consideration is being given to  easing rules on using multiple types of pensions to allow retirees to  choose different combinations from existing, relatively well-understood  pension products.

* Proposed default illas, whether  provided within or outside a retirement fund, will be permissible as a  default option only if they meet strict conditions, including design  criteria and limits on investment choices, drawdown rates and costs.  Collective investment scheme managers will also be able to provide  retirement funds with default illas, provided they meet the conditions.

Treasury says the progress of  these reforms will be monitored through detailed compulsory reporting by  product providers on annuity (pension) purchases made by individuals  retiring from funds, investment charges and the asset mix of illas, and  the purchase prices and terms of conventional annuity policies.

GOVT PONDERS COMPLEXITY OF SECURITY FOR LOW EARNERS

Government must still spell out  the details of how it intends extending the retirement system to all  employed individuals, particularly those in low-income groups and in  irregular employment, who are mainly excluded from the current system  and rely entirely on the social old-age grant, which will be increased  from R1 200 to R1 260 a month.

The Budget Review says the  retirement reform proposals released with the Budget “will lay the  foundation for the eventual introduction of a mandatory tier of a  comprehensive social security system that provides death, disability and  retirement cover to all workers”.

The backbone of the extended system is likely to be the proposed National Social Security Fund (NSSF).

Patrick Craven, spokesperson for  trade union federation Cosatu, in reacting to the Budget proposals, says  the federation is increasingly frustrated by government’s failure to  introduce comprehensive social security that will ensure that nobody  falls through the safety net.

Cosatu also rejects the piecemeal  reforms of the retirement funding system and wants retirement reform to  be part of comprehensive social security reform.

But in  its discussion paper, Treasury says the situation is complex. Currently,  about half of formally employed workers are members of an  employer-sponsored retirement fund. An analysis based on a labour force  survey carried out in 2010 by the Centre for Research into Economics and  Finance in Southern Africa indicates that 86 percent of workers who  don’t belong to retirement funds earn less than the tax threshold,  indicating that they receive no tax benefit for saving for retirement.  Of these, nearly 40 percent work in sectors where employment can be  erratic.

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