If you have not yet come across the words “P-day” and “T-day”, rest assured that you will soon. The draft proposals circulated and discussed by the national treasury (NT) last year, were published as concrete proposals as part of the budget speech.
We extracted some of the more relevant points which will affect your clients, and need to form part of long term retirement planning. Most of this comes from the executive summary. Those wishing to read the full document can download it here. It also contains examples to aid understanding.
Taxation of retirement funds
- From an effective date, on or after 2015, called T-day, employer contributions to retirement funds will become a fringe benefit in the hands of employees for tax purposes.
- Individuals will be able to receive a tax deduction on employer and employee contributions to a pension fund, provident fund or retirement annuity fund up to 27.5% of the greater of remuneration and taxable income. A ceiling of R350 000 will apply. This proposal is described in more detail in Chapter 4 of the Budget Review.
- Unused deductions may be rolled over to assist those with volatile incomes.
- Full vested rights with respect to withdrawals from retirement funds will be protected. Amounts in retirement accounts at the date of implementation of the legislation, called P-day, and growth on these, can be taken in cash, but from a preservation fund, and subject to taxation as currently.
- After P-day, all retirement funds will be required to identify a preservation fund and transfer members’ balances into that fund, or another preservation fund, when members withdraw from the fund before retirement.
- Existing rules on preservation funds will be relaxed to allow one withdrawal per year, but the amount of each withdrawal will be limited. Unused withdrawals in any year may be carried forward to future years. Withdrawal limits will account for vested rights as described above.
- Payments resulting from divorces will also need to be paid into preservation funds rather than being paid in cash.
- The annuitisation requirements of provident funds and pension funds will be harmonised. However, the new annuitisation rules will only apply to new contributions made to provident funds after P-day, and growth on these contributions. Existing balances in provident funds, and growth on these, will not be subject to annuitisation.
- In addition, members of provident funds who are older than 55 on the date of implementation will not be required to annuitise any of their balance at retirement, provided they remain in the same provident fund until they retire.
- To lessen the impact on provident fund members, the means test for the old age grant will be phased out by 2016, and the de minimis requirement for annuitisation will be raised from R75 000 to R150 000.
- Trustees will be required to guide members through the retirement process, to identify a default retirement product in accordance with a prescribed set of principles, and to automatically shift members into that product when they retire, unless members request otherwise. The fund itself may provide the default product, or it may use an externally-provided product.
- Living annuities will be eligible for selection as the default product, provided certain design tests, including charges, defaults, investment choice and drawdown rates, are met.
- Trustees could be given some legal protection in respect of the choice of the default product, provided that certain conditions are met, including that members are given access to commission-free independent financial advice when they leave the fund, paid for by the fund on a salary or fee-for-time basis.
- To increase competition, providers other than registered life offices will be allowed to sell living annuities.
As can be seen from the above, the duties of trustees will be extended considerably. The new look FSB, after the introduction of the Twin Peaks model, will monitor trustee appointments, and see to it that trustees meet “fit and proper” requirements.
A new incentive, aimed at getting people back into the savings habit, is the implementation of tax-preferred savings and investment accounts. All returns accrued within these accounts and any withdrawals would be exempt from tax. The account would have an initial annual contribution limit of R30 000 and a lifetime limit of R500 000, to be increased regularly in line with inflation. The new accounts will be introduced by 2015, and will co-exist with the current tax-free interest income dispensation.
It will be interesting to see how this will affect the popularity of retirement annuities.
These proposals are open for discussion until 31 May 2013, after which legislation will be drafted.
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