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The 1st of March 2016 marked what has become known as T-day – the day the long awaited tax reforms became a reality in the retirement industry and for retirement fund members.
For a simple explanation of the changes please view the video by selecting the relevant video button below. Please note the Zulu and Xhosa videos are scheduled to be updated to include reference to a delay in respect of provident members' annuitisation. This delay is proposed for a further 2 years – provident fund members can thus still access the full fund at retirement up to March 2018.
Essentially, the amendments will facilitate better tax alignment across pension, provident or retirement annuity funds. However, Romeo Msipha, Senior Consultant of Old Mutual Corporate Consultants, says there has been some
uncertainty among retirement fund members about exactly how their retirement savings will be impacted by these new rules.
Initially the amendments were going to introduce tax harmonisation and the annuitisation of retirement funds over a specific amount. However, it was announced in the 2016 Budget Speech that the Revenue Laws Amendment Bill
2016 will give effect to the decision by Government to postpone the annuitisation requirement for provident and provident preservation fund members by a further two years.
Msipha says that the changes have caused some confusion among members, and stresses it is important for members to understand if and how they will be affected.
Msipha unpacks the key elements of the new rules:
Pension, provident or retirement annuity funds previously had different tax deduction allowances. As of 1 March 2016, members of all approved funds (pension, provident and retirement annuity funds) qualify for a contribution
deduction of 27.5% of the greater of their taxable income or the total remuneration that they receive from their employer. A member can contribute the total amount into a single fund or a combination of funds (e.g. some into a
provident fund and the rest into a retirement annuity fund).
This tax deduction is now capped at R350 000 per year, which means only a person with taxable income or remuneration exceeding R1 272 727 per year will reach this maximum. Contributions not claimed for the year can be
rolled over and claimed in the next year.
For pension, pension preservation and retirement annuity fund members, the amount of money allowed to be taken as cash at retirement (known as the ‘de minimis for annuitisation’) has increased from R75 000 to R247 500.
This means that if a member’s savings in the pension fund at retirement is R247 500 or less, the member can take the entire retirement benefit in cash. However, if their retirement interest in the fund at retirement is for example
R270 000, then the member must use two thirds (R180 000) to purchase an annuity and may only access the balance (R90 000) in cash. This annuity rule is not new for pension, pension preservation and retirement annuity fund
members as they were already required to purchase an annuity at retirement age, provided their savings were above the ‘de minimis’ amount.
Annuitisation refers to purchasing a pension (known as an annuity) at retirement with two-thirds of retirement savings, provided the savings are above the ‘de minimis’ amount.
An annuity is intended to secure a regular income for the fund member after retirement for the rest of his or her life. There are various options available and members are able to choose the type of annuity and the provider when
they retire (depending on the rules of the fund to which they belong).
Before the introduction of the tax law amendments, members of pension, pension preservation and retirement annuity funds were already required to receive two-thirds of their retirement savings at retirement in the form of annuity
payments. The original annuitisation requirement component of these reforms would have required certain provident and provident preservation fund members, depending on their retirement savings amount and other factors, to also
have to purchase a pension (annuity) at retirement. This has however been postponed to March 2018.
The tax law amendments will impact individuals differently, depending on their personal situation and circumstances. The immediate impact can affect members in one of the following ways:
Pension fund members:
Provident fund members:
Retirement annuity (RA) fund members:
Msipha urges members to learn how the new tax law amendments impact their own retirement savings and how they can maximise their savings for a more financially secure future. Increasing contributions to their retirement fund is one example.
For more about these reforms, check out our user-friendly guide for pension and provident fund members.