The ins and outs of retirement reform

As the reforms related to tax harmonisation of retirement funds is set to become a reality on1 March – or T-day, as it has become known – it is vital members are communicated with in order to avoid hasty, and potentially damaging actions.

There has been much uncertainty from members as to how they will be impacted. The below Q&A aims to assist provident fund and pension fund members understand the latest amendments and to what extent they are impacted by the changes.

Provident fund members

1. Can a member get their provident fund savings in cash if they resign, are retrenched or dismissed prior to retirement?

– Yes they can still take their benefit in cash. There is no change to this right.

1. What happens when members retire after 1 March 2016?

– Only the contributions made after 1 March 2016, plus investment growth thereon, will be subject to the new rules.

1. What are the new retirement benefit rules?

– All members’ savings up to 1 March 2016 (called T-Day) plus investment growth will be treated in the same way as before. These savings are referred to as the member’s “vested rights”. These are completely unaffected by the new legislation.

– After T-Day all members of provident funds who are under age 55 and whose retirement savings, as reduced by their “vested right” amount, is more than R247 500, will be required to buy pensions / annuities using at least two-thirds of this amount.

– This annuity will secure for the member a regular income (usually monthly) for life.

1. What is the amount above which a member must buy this pension?

– If a member’s retirement savings as reduced by their “vested right” amount is more than R247 500 when they retire, they will be required to buy a pension with 2/3rds of this amount. This is not your total retirement savings, only the contributions and any growth from 1 March 2016.

1. What if they have other savings in other retirement funds like retirement annuities?

– The R247 500 (which is referred to in the industry as the de minimis amount) applies to each fund as a separate entity (i.e. per fund).

1. What happens to members close to retirement?

– Members aged 55 years and older as at 1 March 2016 will not be affected at all by the annuitisation requirement provided they remain on the same provident fund of which they were a member on T-Day (1 March 2016) until retirement.

– Should a member, over the age of 55 at T-Day, change funds after T-Day, then the contributions plus growth thereon made to the new fund after T-Day will be subject to the annuitisation requirement.

– The de minimis rule will however apply to this amount.

1. What happens to my contributions?

– In terms of current legislation (in place now before the new changes come into effect), only employers are able to make tax deductible contributions to provident funds. The amount of such contributions is limited to 20% of retirement funding income.

– Under the new rules all contributions, including those made by the employer, will be treated as if they were made by the member.

o    The member in turn qualifies for a tax deduction up to 27,5% of the greater of his taxable income or remuneration.

o    This deduction is capped at R350 000 p.a. so this will only affect members earning over R1,272,727 p.a.

o    PLEASE note that the 27,5% limit applies to the total amount of all contributions to all funds to which the member may belong  i.e. pension, provident and retirement annuity funds.

– The immediate effect of this is that after T-Day provident fund members will enjoy tax deductibility on their own contributions which means that their take-home pay should rise. They will also be able to make bigger contributions.

1. Why is the government doing this?

– The government is trying to help members by simplifying the rules, encouraging savings through retirement funds by using tax concessions, and ensuring members get an income after retiring.

1. Is the government nationalising my funds?

– No. The fund trustees will still make decisions in the retirement fund. Employers will still be able to control the benefit structures of their employees. Members will still be able to choose the type of annuity and the provider when they retire.

1. Is the government forcing me to preserve my savings when I change jobs?

– No. The new rules do not deal with preservation at all. There is no change. There is no reason to resign to retain current rights.

Pension fund members

1. How are pension fund members affected by the new rules?

– Pension fund members are affected by the ‘harmonisation’ changes which mean that all retirement funds are subject to similar retirement and contribution rules.

1. How do the new rules affect my retirement benefits?

– Pension fund members are already required to receive their benefits in the form of annuity payments so they are largely unaffected by the new rules which come into effect on 1 March 2016.

1. Are my retirement benefits affected at all?

– The ‘de minimis rule’ also applies to pension fund benefits.

– The de minimis amount will be increased from R75 000 to R247 500 with effect from T-Day.

– This means that ONLY if the total amount of your money in the fund upon retirement from the fund exceeds R247 500 will you be required to buy a pension.

– Total fund benefits, if they are less than this amount, can be taken in cash.

1. How do the new rules affect my contributions?

– Under the new rules all contributions, including those made by the employer, will be treated as if they were made by the member.

– The member in turn qualifies for a tax deduction up to 27,5% of the greater of his taxable income or remuneration.

– This deduction is capped at R350 000 p.a. and accordingly only affects members earning over R1,272,727 p.a.

1. Are the tax deductible amounts greater under the new rules?

– In terms of current legislation employers and members are able to contribute a total of 27,5% (employers 20% and employee members 7.5%) to Pension Funds and deduct these from their taxable income.

– The amount on which the calculation is based is known as retirement funding income.

– After T-Day these contributions will be based on the higher of taxable income and remuneration which may allow for higher tax deductible contributions, subject to the overall cap of R350 000.

– PLEASE note that the 27,5% limit applies to the total amount of all contributions to the member’s approved retirement funds i.e. pension, provident and retirement annuity funds.