Author: Cindy Wilson and David Crossley, Wealth and Advisory, BDO South Africa
Johannesburg, South Africa- November. 06, 2014 A great deal of controversy has surrounded the Government’s proposed legislative changes to current Retirement Funds in 2015. Already a number of employees have taken extreme measures and have resigned from their employment in order to cash in their Provident Fund savings. These actions were taken under the mistaken belief that the Government would not allow members access to their benefits, once the law was implemented.
This is all conspiracy however, as nothing could be further from the truth. The Government’s main objective in making the changes to Retirement Funds is to encourage people to save more for their retirement. Secondly, the changes are to help make this process as simple and as tax effective as possible.
These considerations and amendments have resulted in a possible two year delay by National Treasury. However, these changes will still be implemented and it is essential that everyone understands the implications of these proposed changes. A significant modification is:
- Employer contributions to retirement funds will be taxed as fringe benefits in the hands of employees. The employer may then deduct up to 27.5% of total remuneration in respect of contributions (employer and employee) to pension, provident and retirement annuity funds, subject to an annual cap of R 350 000.
The next major change relates to members’ options on retirement.
If we accept that the purpose of saving for retirement is to create a regular income when we retire, then it stands to reason, for future financial security, that a limit be applied to the lump sum that members can cash in when they reach retirement age. The following are to be taken into consideration:
- Provident funds will align with pension and retirement annuities funds, and all will be subject to the same taxation regime. At retirement, one third of the fund value can be taken as a lump sum, while two thirds must be used to buy retirement income, regardless of whether it is a provident or pension fund. This will, however, only apply to contributions paid AFTER the implementation date on provident funds and will not apply to the value a member has in the provident fund at the implementation date (plus future growth on this value). This value may still be paid as a lump sum going forward and will not be subject to the one third limit that applies to contributions after implementation date. Members of provident funds above the age of 55 at the implementation date will also still enjoy full access to their full benefit at retirement.
- Tax free portability of retirement funds. Fund benefits will be capable of being transferred between all retirement and preservation funds tax-free. In particular, tax-free transfers from pension funds and retirement annuities to provident funds will now be tax-free.
- Commutation threshold upon retirement will be increased from R75 000 to R150 000 for all retirement funds. This means that if the retirement benefit of a member is R150 000 or less, the member will be allowed to take their whole benefit as a cash lump sum; he or she will not be required to buy a pension with at least two-thirds of his benefit.
A noteworthy fact is that members will still be allowed to take their withdrawal benefits in cash. Members are not required to keep their withdrawal benefits in a retirement fund when they change employers.
A common reaction to change is anxiety, rumour mongering and emotion which often takes precedence over fact and actual situation. To this end, individuals are urged to consult their respective employers or financial planners to ensure that they have the correct information at hand before making permanent, and possibly damaging, financial decisions.
About BDO South Africa:
BDO in South Africa is the South African member firm of BDO International. BDO is the brand name for the BDO network and for each of the BDO member firms. The global BDO network provides audit, tax and advisory services in 147 countries, with over 55,000 people working out of 1,200 offices worldwide. Service provision within the international BDO network of independent member firms (‘the BDO network’) is coordinated by Brussels Worldwide Services BVBA, a limited liability company incorporated in Belgium with its statutory seat in Brussels.
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