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Feedback from National Treasury workshop: Retirement reforms

Wednesday, 04 November 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Options for retirement reform

The purpose of the workshop was to harmonise the tax treatment of retirement fund.Tax reforms will be implemented as scheduled on 1 March 2016 through the 27.5% or R350 000 cap. According to National Treasury equity objectives cannot be further delayed.

On retirement reform related to annuitisation for provident funds, two options are proposed:

Option 1:

Keep current legislation, but increase the amount at which retirement fund members are required to purchase an annuity. Could be increased to R250 000 – longer time till any member is affected. The higher de-minimus applies to all retirement funds.

Option 2:

Delay the requirement for provident fund members to purchase an annuity on retirement. Under this option the requirement to purchase an annuity would be delayed. A limited tax deduction would be available in the interim for provident fund members.

Given that this is being considered at a late stage, the legislation that was tabled in Parliament includes a version of option 2.The final option would hopefully require minimal amendments to the legislation.

The draft legislation allows for:

  • The introduction of the TLAA, 2013 reforms for pension funds and retirement annuity funds
  • A phased approach for provident funds: 

2016/17 – No annuitisation, tax deduction of 27.5% / R350 000

2017/18 – No annuitisation, tax deduction of 10% / R125 000

2018/19 – Required to annuitise, full vested rights for those over 55

Tax deduction is linked to the requirement to annuitise 

1.      Principle is that if there is no annuitisation, then a taxpayer cannot receive the full tax deduction. 

  • However, submissions received after the presentation at the Standing Committee on Finance said it would be difficult to implement a lower tax deduction for provident funds at this stage.
  • Can therefore allow the current higher tax deduction to apply for provident funds on a temporary basis for 2016/17 to smooth the transition.

2.      The higher tax deduction of 27.5% or R350 000 for provident fund contributions would be available if the requirement to purchase an annuity applies to provident funds. 

3.      If no annuitisation, the 10% / R125 000 would remain (section 11(kA))

  • The lower limit is a subset of the 27.5% or R350 000 cap.

4.      Full vested rights (as per the TLAA, 2013) would apply when annuitisation is introduced. 

5.      Transfers from pension funds to provident funds can only be allowed when annuitisation is introduced.

Comparing the phase-in options for provident funds 

Responses from the sectors represented at the workshop

The lower 30 000. 00 threshold should be apply to all funds.

Option 1 with required no legislation chances is most preferable, because it is administrative easier to implement.

Option 2 A scrap annuitisation is do able. However, the problem is the 10% cap. National Treasury support Option 2A, but do not want to reverse next year because protest from unions.

Option 2B is not support by the sector because of the administrative burden it will place on the sector.

Option 2C is supported by the sector, if the tax deductible is rise to 15%.

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