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Retirement Planning
Tuesday, February 23, 2016 - 12:19
March launch

The tax treatment of retirement funding will change with effect 1st March 2016. These changes intend to harmonise the tax treatment of the various retirement funding vehicles used in South Africa and increase savings towards the protection of retirement funding for post-retirement through forced annuitisation in respect of provident fund contributors. Provident fund members will be required to apply two-thirds of the fund benefit to acquire an annuity on retirement. Retirement funds with values less than R247 500 (up from R75 000) do not have to be annuitised.

Tax deductions in respect of retirement funding contributions increase to 27.5% of the greater of remuneration or taxable income. The 27.5% applies to combined contributions to pension, provident and retirement annuity funds. Pre-1 March 2016, different deductions ceilings apply to the various funding vehicles. Individuals will be able to claim a maximum of R350 000, subject to the 27.5% limit. Excess contributions can be carried forward and unclaimed contributions will not be taxed at withdrawal or retirement.

Only the employee will be entitled to claim the tax deduction (in respect of employee and employer contributions). The employee’s monthly PAYE will be calculated based on the reduced taxable income. Employer contributions will be taxed as fringe benefits in the hands of the employee.

These changes apply to contributions and returns earned on or after 1st March 2016. Pre-1 March 2016 fund build-ups will be governed by the old rules. The new rules will not apply to provident fund members who are 55 years or older on 1st March 2016, although the new rules will apply to contributions to new funds.

The base used to calculate the tax deduction has also changed. Contributions to pension and provident funds were previously calculated with reference to approved remuneration and pensionable income, respectively. The deduction will now be calculated with reference to gross remuneration or taxable income. The base is therefore extended to include rental, investment, and other non-salary type income, which was previously only available to calculate Retirement Anuuity Fund tax deductions.

Employers can decide to maintain employer contributions and levy fringe benefits tax, with the resultant change in PAYE or they can also opt to change to employee-only contributions only, thereby increasing the employee’s salary and employee contribution. This may require changes to the fund rules as far as contributions between employer and employee go. Group life premiums will increase where pensionable salary increased which could result in bigger cover, unless group life determination is changed. Most changes would require agreement and communication with employees and form part of employment contracts.
By Ferdie Schneider, National Head of Tax, BDO South Africa

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