Retirement reforms: What do they really mean?

The new retirement rules, which will be implemented from 1 March 2016, have been met with a mixed response. While those in the financial services field believe this to be a good move by government, the Congress of South African Trade Unions (COSATU) is opposed to the amendments.
 
However, Rob Cooper, tax expert and director of legislation and proposed legislation at Sage HR & Payroll, has said that the concerns raised by COSATU and others seem to be counterproductive. “Employers should help educate employees about what the new laws mean and how they will benefit nearly everyone except the highest income earners.”
 
One of the concerns of COSATU is that provident fund members will only be able to take one third of their retirement benefit as a cash lump sum at retirement. The remainder of the funds will need to be annuitised. However, these rules will only apply to contributions that are made after 1 March 2016 and for people under the age of 55. “Only those with savings exceeding R247 000 will need to annuitise their income,” added Cooper.
 
According to a recent report, government will be relooking at several clauses of the new Tax Laws Amendment Act to try and calm the debate with COSATU. The Association for Savings and Investment South Africa (ASISA) is concerned about reports that the Tax Laws Amendment Act may be postponed.
 
“The reality is that the previous 12-month delay in the implementation of the harmonisation of the tax treatment of retirement funds as well as annuitisation, has by implication also delayed the financially secure retirement of many South Africans.
 
“We firmly believe that yet another postponement would not only be a grave injustice to our citizens, but also create more policy uncertainty that our country can ill afford at this time when our country is determined to avoid another downgrade in our credit rating,” emphasised ASISA.
 
What do the reforms mean?
 
In the past, tax laws dealt with the taxation of pension, provident and retirement funds in different ways. However, the new tax regime treats all retirement fund types in the same way, revealed Cooper.
 
Prior to the new reforms, a person who was a member of a provident fund could manage the fund as they saw fit, with the option to withdraw the entire amount on retirement. This will no longer be allowed. From 1 March 2016, members of provident funds will only be allowed to withdraw a third of their funds, with the remaining two-thirds being used to purchase an annuity.
 
“Like those currently using RAs (retirement annuities), members of a provident fund will now also be able to gain the tax deductions from contributions, as opposed to companies who previously received the benefit,” noted Preenay Sathu, channel head of FNB (First National Bank) Financial Advisory.
 
Sathu emphasised: “Importantly, the money is not administered by government as is commonly misunderstood. It is safe and in the hands of reputable and long-standing financial service providers in a highly-regulated financial services sector. Government is not administering it, as many often assume.”
 
It is important to note that the changes from 1 March 2016 will only be applicable to funds invested post 1 March 2016 and the growth upon these. The old rules will still apply to all funds accrued up to 29 February 2016.
 
“So you can still access the entire lump sum accrued up to 29 February 2016. Anything accrued from 1 March 2016, up until you retire, falls under the new rules: so one third lump sum and two thirds to purchase an annuity,” elaborated Sathu.
 
Furthermore, if your accrued retirement funds from 1 March 2016 do not exceed R247 000, you will be able to withdraw the entire amount in cash. In addition, the old rules will still apply to anyone who is 55 years or older on 29 February 2016.
 
The rules are also only applicable upon retirement. If you are to resign your job, you are allowed to take the full lump sum when leaving the retirement product, if you choose to. However, the normal tax laws will still apply.
 
The new tax laws
 
Under the new laws, Cooper explained that the total retirement contribution of the employee and employer will be tax deductible up to R350 000 per annum or 27.5% of an employee’s annual remuneration. As a result of these changes, Cooper highlighted that some employees may take home slightly more money.
 
“Under these new rules, government is giving low-income and middle-income earners a powerful incentive to save for the future. Treasury is correct to treat retirement reform as an urgent and important matter in a country where some two thirds of people don’t have adequate funds for retirement,” stated Cooper.
 
In addition, Sathu revealed that at retirement only R500 000 of your lump sum withdrawal is tax free. According to him, it therefore makes sense to only take out this amount and transfer the remainder of the funds into an annuity.
 
Cooper added: “By encouraging people to plan for their retirement, the National Treasury is sacrificing short-term tax revenue in order to relieve pressure on the fiscus in the future. Empowering people to look after themselves in retirement is good for individuals and good for the state. It’s also good for payroll administrators in the long term because it standardises and simplifies the tax treatment of retirement fund contributions by the employer and employee.”
 
Who will be negatively affected?
 
According to Cooper, there are only four categories of employees that may be worse off under the new tax laws. These are:
 

1. Employees who earn more than R1.27 million per year.
2. Employees who benefit from excessively large employer contributions.
3. Those whose UIF contributions might increase as a result of their higher taxable income (as a result of employer’s contributions being treated as a fringe benefit).
4. People whose remuneration will rise from marginally below the tax threshold (R73 650 per annum) to above the tax threshold as a result of the new fringe benefit. However, in some cases the tax deduction may exceed the fringe benefit and move the employee back below the tax threshold.

 
COSATU’s objections 
 
COSATU has said that it will march on 1 March 2016 in opposition to the new Tax Laws Amendment Act and the included retirement reforms.
 
COSATU has a number of objections to the new Tax Laws Amendment Act. Some of these are:
 

• The law introduces the concept of preservation through the back door without an agreement at NEDLAC (National Economic Development and Labour Council). From 1 March 2016, new contributions to any retirement fund will be subject to the same tax dispensation, and these contributions, and growth on them, will be subject to the same annuitisation requirements when members retire (that is, that no more than one-third may be taken in cash and the rest must be taken in the form of a pension).
• The law as it stands will destroy all provident funds as we know them and will create only massive profits for the private sector as workers will be expected to buy annuities.
• It criminalises the right to choose and it signals the emergence of an overbearing state that wants to have a say in how and when workers can spend their money.
• The poor will end up subsidising the rich because poor workers with no medical aids and working in vulnerable and exposed workplace environments have a high mortality rate.
• The systems of employers and service providers are not ready for this law.

 
Michelle Acton, principal consultant at Old Mutual Corporate Consultants, emphasised that the new tax law amendments are not government’s way to force people to preserve their retirement savings. “The new rules do not deal with preservation at all. There is no change. There is no reason to resign to retain current rights.”
 
In other words, if you resign your job, even after the new tax law amendments come into play, you will still be able to decide whether you preserve any retirement savings you had with the company or if you take the funds. However, the relevant tax payable on this amount will still be applicable.
 
“Given South Africa’s low rate of savings, this rule makes enormous sense. It could do a great deal to ensure that employees preserve their retirement savings rather than depleting them,” added Cooper.