Retirement reforms signed in to law

As of 1 March 2016, key retirement reforms that have been long awaited and extensively debated will come into effect. These reforms, 2015 Tax Administration Laws Amendment Act No. 23 of 2015 and Taxation Laws Amendment Act No 25 of 2015, were signed into law by President Jacob Zuma on 12 January 2016.

National Treasury explained in a statement: “The two Acts were published in Government Gazettes 39586 and 39588, respectively, last Friday 8 January 2016 after the President assented to the two Acts on 24 December 2015. The Rates and Monetary Amounts and Amendment of Revenue Laws Act No. 13 of 2015 was assented to by the President last year and published in Government Gazette 39421 on 17 November 2015.”

According Michelle Acton, principal consultant at Old Mutual Corporate Consultants, the retirement reforms will have the potential to deliver more benefits to retirement fund members.

What the reforms mean
“The enactment of the 2015 Taxation Laws Amendment Act completes the legislative process to enable the tax harmonisation of retirement fund contributions and benefits, as mentioned in the National Treasury press release of 3 December 2015. The 2015 Taxation Laws Amendment Act increases the de minimis threshold for annuitisation (see below for explanation) from R150 000 (in the 2013 legislation, the Tax Laws Amendment Act No 31 of 2013) to R247 500; and closes certain coverage gaps in the 2013 legislation,” revealed Treasury.

The 2013 legislation mentioned above will also come into effect on 1 March 2016. This allows “for a tax deduction for all retirement funds up to 27.5% of the greater of taxable income or remuneration, up to a limit of R350 000,” highlighted Treasury.

Acton elaborated on what the reforms mean for retirement fund members.

• Members of all approved funds (Pension, Provident and Retirement Annuity Funds) will be afforded a contribution deduction of 27.5% of the greater taxable income or remuneration, subject to a yearly maximum of R350 000.
• Employer contributions to retirement funds will be taxable as fringe benefits, with these contributions being deemed to be employee contributions for the purposes of claiming the deduction.
• The rights of Provident Fund members to take retirement benefits in cash will be protected for all benefits that they have accumulated up until T-day (the day the reforms come into effect) plus the growth thereon until their retirement. This amount will not form part of these members’ “retirement interest” for the purposes of applying the annuitisation requirements that they will be subject to from T-day.
• The de minimis annuitisation amount will be increased from R75 000 to R247 500. This means that, from 1 March 2016, members who retire from approved retirement funds with “retirement interests” (i.e. for Provident Fund members, only their post T-day savings plus growth) in the fund of less than R247 500, may take their entire balance in the fund in cash and will not have to annuitise any amount.

If their “retirement interest” in the fund at retirement is above this de minimis amount, the member can take one-third of their “retirement interest” in cash and the remaining two-thirds of the “retirement interest” will need to be used to purchase an annuity. For provident fund member savings, any pre T-day savings plus growth thereon may always be taken in cash.

How do these reforms affect the public?
There are mixed feelings about what these reforms mean for retirement fund members. While Acton believed that these changes are general good news for retirement fund members as in many cases it will result in increased take-home pay, not everyone agrees.

Cosatu (the Congress of South African Trade Unions) has stated: “This disdainful act of provocation by government will get an appropriate and equal response from the workers. Workers will fight any attempts to impose the compulsory preservation of our hard earned deferred wages. We will spare no effort to stop this tyranny; because no government has a right to unilaterally decide for workers, how and when to spend their retirement savings.”

Furthermore, Cosatu added: “These savings are part of worker’s hard-earned salaries and should be accessible to the workers, as and when they need them, especially in the absence of a comprehensive social security.”

The aim of these reforms appears to be to encourage people to preserve their retirement savings. Treasury has reportedly warned retirement fund members that cashing in their provident or retirement fund savings will result in high taxation, as well as affecting the growth of the retirement savings.

Acton noted: “While the T-day reforms have the potential to deliver benefits for fund members, unlocking these benefits in full will require action by employers and their advisers, in consultation with employees and members. Members will need to be consulted on whether they want to merely benefit from any cost savings that may become available or whether they prefer to leverage the reforms to save more towards their retirement.

“Doing this could be especially advantageous to those fund members who are behind on their retirement savings.”

She added: “Old Mutual Corporate welcomes the T-day changes and is well on track to implement the systems and processes required to accommodate them.”