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Retirement reform at a crossroads

Delay in increased retirement fund tax deductions proposed.

JOHANNESBURG – Taxpayers will likely have to wait another two years before they will be able to claim an increased tax deduction for contributions to pension and provident funds and retirement annuities.

This follows a new proposal by National Treasury in parliament this week to delay the implementation of the tax harmonisation on retirement funds from March 1, 2015 to March 1, 2017.

The earlier proposal would have allowed individuals to claim a tax deduction of up to 27.5% of the greater of remuneration and taxable income on contributions to a pension fund, provident fund or retirement annuity and was an effort to harmonise the tax treatment of these retirement vehicles. Currently the deduction is significantly lower and the tax treatment of the various vehicles differs.

In terms of the new proposal, the introduction of an annual R350 000 contribution ceiling will also be delayed for two years.

According to a presentation by National Treasury the contributions to provident funds will continue not to benefit from the tax deduction enjoyed for contributions to pension funds till 2017.

It stressed that provident fund members would in future still be allowed to take a cash lump sum for funds that had already been saved and that they would not be forced to annuitise historic savings.

“Annuitisation will not apply to provident funds for any contributions before March 1, 2017 and will still be cashed out in one lump sum forever. Only new contributions after 2017 above R150 000 and enjoying the tax deduction will annuitise thereafter for those below 55 years,” the presentation said.

It seems that government is concerned about misleading rumours around the nationalisation of retirement funds and preservation, which have fuelled pre-mature resignations to access retirement funds.

National Treasury said the postponement was raised in meetings with the National Economic Development and Labour Council (Nedlac).

Labour unions have been quite vocal in their opposition to certain elements of the proposed retirement reform process, especially compulsory preservation. It seems they want more clarity on social security reforms before they will commit to support further retirement changes.

The new proposal comes just a few months before the changes were to take effect.
Cobus Strydom, head of consultants at Absa Consultants and Actuaries, says the majority of members would have been able to save for retirement in a much more tax-efficient way from March 1 next year.

They will now have to wait till 2017 to take advantage of the new proposal, he says.

However, a relatively small group of members with a considerable pensionable remuneration will benefit from the delayed implementation of the R350 000 limit, Strydom says.

He says the announcement is unfortunate for provident fund members who cannot deduct their own contributions for tax purposes and who would have been able to do so from next year.

Rowan Burger, head of alternative products at Momentum, says a lot of service providers have done considerable work to prepare for the change and are being penalised for acting proactively.

Strydom agrees. He says service providers have already spent a significant amount of time and money to be ready for the change next year, for example by implementing changes to their administrative systems.

Rule amendments will also have to be put on hold, Burger says.

He says a lot of service providers run dual pension and provident funds for individuals – a pension fund structure for member contributions and a provident fund structure for company contributions – which are expensive.

The new proposal means that there will be unnecessary expenses in the system for a prolonged period, he says.

Although there have been reports of especially teachers resigning in an effort to cash in their retirement savings due to fear that they would not be able to do so once the reforms take effect, Burger says this is a knee-jerk reaction.

Government has indicated on a number of occasions that legacy assets will be protected, he says.

While National Treasury highlighted the need for new proposals to be discussed at Nedlac, it stressed that it still wants to incentivise members to preserve their retirement savings.

The new proposal does not seem to have an impact on the proposed implementation of tax-free savings accounts on March 1, next year.

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