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Retirement Planning
Wednesday, March 2, 2016 - 03:16

The new retirement reforms should be viewed positively rather than with suspicion. They are aimed at promoting retirement saving in South Africa and ensuring that people who invest in the various types of funds are better positioned to enjoy their retirement.

David Crossley, practice manager at BDO South Africa, says while the changes may not be regarded as exciting, they are being misinterpreted by many as being more unfriendly than they actually are. “When they were first put on the table, many South Africans panicked, some going so far as resigning to get their funds and then battled to get their jobs back.

“Irrespective of the new dispensation, many people do not realise the implications of what they’re going to have to accumulate in order to retire with sufficient capital to provide an income that will sustain them through their retirement years. Extended life expectancy has made this a more challenging aspect of retirement in the 21st Century.

“A rule of thumb is R1m of capital is worth R5 000 of monthly income. If you’re currently earning R20 000 per month and you want to retire on the same monthly income, you need R4m worth of capital. To my knowledge, the vast majority of people are nowhere near this,” says Crossley

The reforms are expected to come into effect in March 2016 and will see provident funds being aligned with pension and retirement annuity (RA) funds, making them subject to the same tax regime.

From 1 March 2016, the employee deduction for retirement contributions will change to a maximum member deduction of 27.5% of remuneration or taxable income. This will apply to all funds – pension funds, provident funds, RAs – that an individual is a member of.

Crossley says this differs from the current scenario whereby a complex formula applied to calculate retirement contributions. “This proposed reform will simplify matters significantly in terms of calculating contributions.”

In addition, an overall tax deductible limit of R350 000 per annum will apply to contributions. Any contribution by employers will be included in the member’s income as a fringe benefit and will qualify for deduction by the member, subject to the 27,5% and the annual ceiling of R350 000. This differs from the current system where provident funds, RAs and pension funds are capped individually.

He adds that contributions in excess of R350 000 are still allowed, but will not be eligible for tax deduction. “The downside for high earners is that they will only be able to claim R 350 000 pa as a tax deduction. There is, however, an opportunity for high earners to put away more money before the end of February 2016 if they are not contributing the full 15% of non retirement funding employment.”

It is still important to note that contributions made in excess of the statutory formulae for deductible contributions are accumulated at retirement to form part of the tax free benefit. These excess contributions can also be set off against pension income if they are not first taken as a tax-free lump sum.

To receive approval from SARS, pension funds may not pay out more than one third of the member’s fund interest as a lump sum on retirement, unless it is R247 500 or less. In future, provident fund retirement lump sum benefits will also be limited to one third of a member’s fund interest.

Notably, only the portion of the provident fund interest relating to contributions after 1 March 2016 will be subject to these new rules and provident fund members aged 55 or older on this date will not be subject to this new regime.

Crossley says the other big change on the table is to discontinue the provision of provident funds in South Africa from 1 March 2016. “As I understand it, we are the only country in the world with a provident fund. Every other country has pension funds.

“The proposal is that existing provident funds will continue to be vested as provident funds up unit 29 Feb 2016 and continue to earn investment returns. On retirement, the individual will be able to take the lump sum that was accrued until 29 Feb 2016 plus growth to retirement. After 1 March 2106, everything will accrue as a pension fund.

This means the individual will end up with two funds – the old provident fund until 29 Feb 2016 and a new pension fund from 1 March. While they will both form part of the same retirement fund, they will be apportioned separately.”

BDO’s advice to South Africans:

  • Belong to a company pension plan if you can.
  • If you don’t work for a company with a pension plan, start saving in an individual pension arrangement.
  • Remember, the South African tax system encourages saving - for every Rand the individuals contribute to a RA or pension fund, they get the percentage equivalent of their marginal tax rate back. That is, if they’re on a marginal tax rate of 30%, they’re actually being given back 30 cents to every Rand.
  • Don’t spend your money when you change jobs – preserve your benefits.
  • Don’t use your pension money to get rid of debt.
  • Save. Save. Save.

Pension, Provident and Retirement Annuity Funds – Post Budget 2016

The one change that let’s us have our cake and eat it too (tax free).

Whilst the COSATU protests against the proposed annuitisation of Provident Fund proceeds were successful, the other changes in the legislation have remained largely unchanged, presenting individuals with excellent opportunities for saving money through these vehicles.

This means that the full value of the Provident Fund can be taken at retirement (There may be tax implications on the withdrawal – which is currently the case) and there is no longer the ‘One third/two thirds’[i] requirement.

For those individuals currently in Provident Funds, their contributions will now be completely tax deductible up to a maximum of 27.5% of taxable income, but with a ceiling of R350 000.

Any contributions in excess of the R350 000 ceiling can be carried forward to the next tax year or be allowed to accumulate to be added to the tax free portion at retirement age. If you take into consideration that in addition to the tax deductibility advantages, that there is no tax on the accumulating proceeds, nor is there any Capital Gains implications.

The result is an investment for retirement that is not only tax effective from a deductible point of view, but has a “Clean” growth unaffected by tax or capital gains on the investment constituents. Talk about having your cake and eating it!

By David Crossley, BDO Wealth Advisers Practice Manager

Copyright © Insurance Times and Investments® Vol:29.2 1st February, 2016
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