Secondary

Retirement funding gets a boost

The Taxation Laws Amendment Act No. 31 of 2013, published in Government Gazette No. 37158 on 12 December 2013, contains very important changes to the tax treatment of contributions to retirement funding.

Hettie Joubert, Legal Adviser at Momentum Employee Benefits, kindly gave us permission to use information contained in legal updates she wrote. The information below is summarised from a more extensive document which includes examples to illustrate the impact of the amendments. We provide a link below to the full document, as well as to the legal update on changes to the tax treatment of retirement funding contributions discussed last week.

The Taxation Laws Amendment Act No. 31 of 2013, published in Government Gazette No. 37158 on 12 December 2013, changes the tax treatment of contributions and aligns the annuitisation requirements between pension, provident and retirement annuity funds.

The following three major changes about the post-retirement alignment will come into effect on 1 March 2015:

  1. A member of a provident fund will no longer be able to take their whole retirement benefit in a lump sum. They will only be able to take 1/3rd in a lump sum, while the rest of the benefit must be used to buy a pension (annuity), the same as with a pension and a retirement annuity fund. However, the member’s vested rights will be protected and they will still be able to take the portion of their benefit that built up before 1 March 2015, plus the growth, in a lump sum. The 1/3rd restriction will not apply to a member who is over the age of 55 on 1 March 2015, unless the member transfers to another retirement fund. It also does not apply to paragraphs (a) and (b) pension funds.
  2. The de minimis threshold has been increased from R75 000 to R150 000. This means that if a member’s total benefit at retirement in a specific fund is less than or equal to R150 000, they can take their whole benefit in a lump sum. It will then not be necessary for them to take 1/3rd of the benefit in a lump sum and buy a pension with the rest. The current de minimis threshold applies to pension, pension preservations and retirement annuity funds. The new threshold of R150 000 will apply to pension, pension preservation, provident, provident preservation and retirement annuity funds.
  3. Following the post-retirement alignment, a member will also be able to transfer between a pension and provident fund and vice versa without incurring any tax liability.

The general rule for fund-to-fund transfers is that if the member transfers from a fund that is less restrictive to a fund that is more restrictive, the transfer will be tax-free. For example, if a member transfers from a provident fund (where they are allowed to take their whole retirement benefit in a lump sum) to a pension fund (where they can only take 1/3rd of the retirement benefit in a lump sum), the transfer will be tax-free. It is Government’s policy to encourage a secure post-retirement income in the form of a mandatory pension to make sure that retirees do not spend their retirement fund benefits too quickly and then outlive their retirement savings and become dependent on the State. To do this, provident fund members will become subject to the same annuitisation requirements as those applying to members of pension and retirement annuity funds.

From 1 March 2015, a member who retires from a provident fund will have to buy a pension with at least two thirds of their benefit. The same requirement already applies to pension and retirement annuity funds. The member will however still be able to take that part of their benefit that accrued up to 1 March 2015, plus the growth, in a lump sum. This protection of their vested rights will apply even if they transfer to another fund. In practice this means that a provident fund will have to maintain two records for each member – one for the benefit that accrued before 1 March 2015, plus the growth, and one for the benefit that accrued after 1 March 2015, with the growth.

It seems as if the position for provident fund members who are 55 years or older on 1 March 2015 with regards to the contributions made after 1 March 2015 has not been finalised yet. The Taxation Laws Amendment Act provides that the 1/3rd restriction will not apply to a person who is a member of a provident fund and who is 55 years or older on 1 March 2015, as long as that member stays in the same fund. He will lose his vested rights with regards to the contributions made after 1 March 2015 if he transfers to another fund, for example if the employer closes down the provident fund. It has been pointed out to National Treasury and SARS that this is unfair. Their response was that legislation would be amended to preserve these vested rights too. This amendment has not been done yet.

The 1/3rd restriction will also not apply to a pension fund as defined in paragraphs (a) and (b) of the definition of “pension fund” in section 1 of the Income Tax Act. Such a pension fund, which is defined as a provident fund in the Second Schedule to the Income Tax Act, is allowed to have a retirement lump sum benefit in excess of the 1/3rd restriction. A member of for example a municipal pension fund whose rules currently allow for their members to take their whole retirement benefit in a lump sum will therefore still be able to take their whole retirement benefit in a lump sum after 1 March 2015.

The de minimis exemption amount will be increased from R75 000 to R150 000 on 1 March 2015. That means that if the retirement benefit of a member of a retirement fund is R150 000 or less, the member would be able to take their whole benefit in a lump sum; he will not be required to buy a pension with at least two-thirds of his benefit. This rule applies per fund, in other words a member who has benefits in three different funds, each of which is less than R150 000, will be able to take all three benefits in a lump sum.

From 1 March 2015, transfers between all occupational retirement funds (pension, pension preservation, provident and provident preservation funds) and transfers from any occupational fund to a retirement annuity fund will be tax-free. A member in a retirement annuity fund will still only be able to transfer to another retirement annuity fund. The reason for this restriction is that a retirement annuity fund has a restriction that no other retirement fund has – a member in this fund cannot withdraw from the fund before retirement.

Please click here to access the comprehensive Legal Update 4.

Those wanting to access Legal Update 3, which covers the changes to taxation of retirement funding contributions, can click here.

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