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Update on 2013 retirement reforms and how these affect your compliance requirements

Chris Veegh
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Retirement funds compliance

In his 2013 budget speech, minister of finance Pravin Gordhan outlined a number of retirement reforms with which you have to comply. These include: taxation of retirement funds, compulsory preservation and on-retirement savings. The compliance proposals made by Gordhan followed a series of technical discussion papers and the retirement fund industry was subsequently consulted. Here’s a summary of the proposed changes.


Your employees will be allowed to claim higher deductions from their retirement fund

The 2013 budget increased the amount you can deduct (called the ‘deduction cap’) - for contributions to retirement, pension, provident and RA funds - to 27.5% of your remuneration or taxable income (whichever is greater).

At the moment, there are different amounts you can deduct for contributions to each of these funds:

  • The annual deduction cap is R350 000 (including the cost of risk benefits) but only your employees are entitled to claim their contributions.
  • Your contributions will be subject to a fringe benefits tax, which is expected to come into effect by 1 March 2015 but may be pushed out to 1 March 2016.  

Individuals won’t be able to blow their retirement savings

Presently, the majority of employees who change jobs don’t keep their savings – they use it to pay off debt or splurge on that expensive holiday – which results in them not having enough capital when they retire.

The 2013 budget confirmed that if you happen to withdraw your retirement savings, you’ll be forced to comply with the new law which stated that you must reinvest these funds into another similar retirement savings vehicle. However, there are still some loopholes your employees will be able to use:

  • Employees may then still withdraw the amount in their retirement account as a cash lump sum, subject to the current taxation rules.  
  • Contributions made and returns earned on this amount after this will be subject to the new rules.  

Employees will only be able to make one withdrawal per year from their retirement savings fund against the money they initially deposited. Important to note is that the amount of each withdrawal will be limited and withdrawals that haven’t been used can be carried forward.

As yet, there is no effective date for these proposals. 

Provident fund members will need to buy an annuity

To ensure further that retirement savings last longer, last year’s budget proposed that provident fund members will, like pension and RA fund members, be required to use two-thirds of their fund benefit to purchase an annuity:

  • Those who make contributions after the reforms become effective will need to comply with the new rules and they will need to take into account the return earned on those contributions.
  • Provident fund members who are 55 or older, when these particular changes become effective, are exempt from these provisions as are retirement balances below R150 000 (previously R75 000).

These changes will come into effect on 1 March 2015.

The new laws will standardise the way retirement fund investors must comply with the legislation that governs these policies. The aim is to ensure that savers who benefit from tax incentives go on to secure an income for life. Some could be upset about losing control over their money but in the long run, they’ll appreciate the prospect of a more secure and adequate retirement income.


 

Chris is currently the CIO at 10X Investments. He has over 15 years’ experience in equity analysis and investment. Before joining 10X, he worked as a director of investment strategy at Deutsche Securities in South Africa. He first joined Deutsche Bank in 1994 as an industrial analyst covering construction, electrical and electronics, engineering and IT. He was regularly ranked as one of the top three in various sectors by the Financial Mail and Reuters analyst surveys, with No. 1 ratings for IT and innovative research. Chris worked closely with the founding shareholders of 10X for many years before joining officially in July 2009. He was formerly a senior manager at Ernst & Young.

 

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