Retirement reform

Treasury released a further Consultation Paper together with the Budget documentation. The reform Consultation Paper is trying to bring together the strands of thinking that were set out very clearly in the four papers released by the National Treasury in September/October 2012.

From a tax perspective the critical issues are that Government will proceed with the implementation of tax preferred savings and investment accounts (along the lines of the UK’s ISA). All returns accrued on these accounts and any withdrawals would be exempt from tax. The account would have an initial annual contribution limit of R30,000 and a lifetime limit of R500,000, which it is intended to put up in line with inflation. These new accounts will be introduced by April 2015.

At present the current tax free interest income annual thresholds continue, but with effect from 1 March 2013 is put up to R34,500 for individuals 65 years and over, and from R22,800 to R23,800 for individuals below 65 years. These thresholds will not be adjusted for inflation in future.

With regard to individuals’ contributions to pension and retirement annuity funds, Treasury is planning to implement legislation, and it is not clear whether this would be effective March 2014 or some time in 2015, in terms of which employer’s contributions will be treated as a fringe benefit. Individuals will be permitted to deduct from their taxable income or their employment income up to 27,5% for a contribution to such fund, up to a maximum of R350,000. Last year they were considering having two different scales depending on your age, and have obviously decided to streamline this with one flat rule.

It is further proposed that the annuitisation requirements of pension funds will start to apply to provident funds from a certain date. Existing balances in provident funds and the growth on these, will not be subject to annuitisation. This requirement will not apply to provident fund members older than 55 years at the date of implementation of the new legislation. Government’s goal is to reduce the complexity of the retirement system. It is proposed that contributions in excess of the annual cap of R350,000 could be rolled over to future years.

The Consultation Paper indicates that the means test for the old age grant will be phased out by 2016; and the de minimus requirement for annuitisation of retirement funds will be raised from R75,000 to R150,000. It appears from the executive summary that living annuities will be eligible for selection as a default product from a retirement fund, provided that certain design tests set out by the Treasury are met. Trustees that make commission free financial advice available to members on retirement, paid for out of the fund, will be given some legal protection in respect of the choice of default offered to members.

An interesting point is raised under the heading “Taxpayers with multiple sources of income.” These people are often faced with high tax liabilities on assessment, because of the aggregation of their incomes. Individual employers and particularly pension funds are typically unaware that there are two or more income streams for an employee or pensioner, and each calculates the PAYE as if there was only one. Government will look to address this during the course of the next year. They are considering either higher levels of withholding by employers (but they acknowledge confidentiality as a concern), holding employees responsible for the PAYE at a higher tax rate to take into account the aggregation effect; SARS informing such taxpayers and suggesting preventative measures, and possibly temporary relief in the case of widows/widowers.