RETIREMENT REFORM: TAX HARMONISATION OF RETIREMENT FUNDS
“T-DAY”| 1 March 2016
At the start of 2016, National Treasury announced that the Taxation Laws Amendment Act
had been signed into law by President Zuma. This Act confirms that the “T-Day” reforms will
be implemented on the 1st of March 2016.
The aim of these amendments are to encourage saving for retirement and to protect the
financial security of individuals during their working lives both pre and post retirement.
These are intended to:
• Harmonise the tax treatment of all types of retirement funds (i.e. retirement annuities,
pension and provident funds).
•
Ensure that, going forward, these retirement funds are treated in the same way when
it comes to annuitisation (i.e. being able to take a maximum of 1/3rd of the retirement
proceeds as cash at retirement, with the remaining 2/3rds to be invested in an income
generating solution).
What’s changing?
TAX DEDUCTIBLE CONTRIBUTIONS:
From 1 March 2016, all members who contribute towards a retirement fund (pension,
provident fund or retirement annuity), will qualify for a tax deduction on contributions up to
27.5% of the greater of remuneration or taxable income 1. This rate will apply to the
combination of contributions made to a member’s pension, provident and retirement
annuity funds.
The deduction above will be capped at R350 000 per year- which means, for individuals
earning more than R 1.27 million, there will now be a cap as to how much of their retirement
contributions are tax deductible.
Contributions which employers make into retirement funds will now be seen as a fringe
benefit and will be taxed in the hands of the member - this means that these contributions
will be treated as if they were made by the member and will be included as part of the
member’s taxable deductible contributions.
ANNUITISATION
Currently, at retirement, pension fund and retirement annuity fund members can take up to
a maximum of 1/3rd of the retirement saving as cash, with the remaining 2/3rds to be
annuitised (i.e. be invested in an income generating solution). If the proceeds of their
retirement funds are less than R75 000 (de minimis), the full amount can be taken in cash.
From 1 March 2016, the de minimis amount for annuitisation will be increased to R247 500 and
will apply across all retirement funds (i.e. retirement annuities, pension and provident funds).
1
Taxable income refers to remuneration plus any other income plus e.g. salary + rental income
Remuneration refers to all amounts received by an employee from their employer by virtue of their employment relationship- and
includes salary, bonuses, commissions and fringe benefits.
PROVIDENT FUNDS
•
•
•
•
From 1 March 2016, all contributions made into provident funds will be tax deductible for
the employee, up to the limits mentioned above.
The above annuitisation rule and de minimis amount will now also become applicable to
all provident funds.
For provident fund members under the age of 55, any savings (plus growth) made pre 1
March 2016 may be taken in cash at retirement. Only contributions made after 1 March
2016 plus growth on these contributions will be subject to the annuitisation rule if it
exceeds the de minimis amount.
Members who are 55 years and older on 1 March 2016, when the law comes into effect,
will not be affected, i.e. they will still be able to even take (new) contributions made after
the legislation has come into effect as a cash lump sum at retirement provided they stay
members of the same provident fund. Members, older than 55, who transfer to another
provident fund will be required to annuitise any contributions (plus growth) made into the
provident fund they transferred to- if it exceeds the de minimis amount.
Summary
CURRENT
RETIREMENT ANNUITIES
Greater of:
• 15% of Non-retirement funding income, or
• R3 500 less allowable pension fund
contribution, or
• R1 750
HOW MUCH OF RETIREMENT
CONTRIBUTIONS ARE TAX
DEDUCTIBLE?
PENSION FUNDS
Greater of:
• 7.5% of retirement funding income or
• R1 750
FROM 1 MARCH 2016
PENSION, RETIREMENT ANNUITY AND
PROVIDENT FUND CONTRIBUTIONS:
•
Up to 27.5% of the greater of
taxable income or remunerationfor all types of retirement funds
•
Capped at R350 000
•
Now applies to all retirement
funds (i.e. retirement annuities,
pension and provident funds).
•
Subject to a de minimis amount of
R247 500
•
•
Contributions are tax deductible
Members under the age of 55:
- All contributions and growth
prior to 1 March 2016 are not
subject to annuitisation
- Annuitisation rules apply to
all post 1 March 2016
contributions (plus growth)subject to de minimis amount of
R247 500
Members aged 55+, at 1 March
2016, will be able to take full
amount as cash at retirement
provided they remained
members of the same provident
fund
PROVIDENT FUNDS
Not tax deductible
ANNUITISATION
•
Applies to pension and retirement
annuity funds only
•
Subject to a de minimis amount of R75
000
•
•
Contributions not tax deductible
Full amount can be taken as cash lump
sum at retirement
PROVIDENT FUNDS
•
What does this change mean for members of retirement funds?
1. Most retirement fund members will have increased tax relief because they can
deduct more of their contributions – thus reducing their taxable income.
2. Provident fund contributions will be tax deductible.
How to get these changes to work for you…
1. Take advantage of being able to contribute more
and increase your current retirement fund
contributions.
2. By contributing more to your retirement fund(s),
your tax refund will increase. Re-invest this refund
to enhance your retirement savings.
3. The more of your refund you reinvest, the greater
your subsequent refunds will be.
Examples
For someone who is a member of a Provident Fund:
• Formally employed, member of a provident fund
• 43 years old
• Earning R 25 000/ month
Remuneration
Employer Contributions
(7.5%)
Tax Refund
CURRENT
R 300 000
R 22 500
FROM 1 MARCH 2016
R 300 000
R 22 500
R
R
0
6 645
Increase in yearly tax refund from R0 to R6 645.
This equals to a refund of R553 a month which can be reinvested.
For someone investing in a Retirement Annuity:
• Self-employed, member of a retirement annuity
• 30 years old
• Earning R 83 333/ month
Income
Contributions (at maximum)
Tax Refund
•
•
CURRENT
R 1 000 000
R 150 000 (15%)
R
61 500
FROM 1 MARCH 2016
R 1 000 000
R 275 000 (27.5%)
R 112 750
Ability to increase contributions from R150 000 per year to R275 000
Increase in yearly tax refund from R61 500 to R112 750
For someone investing in a Retirement Annuity and Pension Fund:
• Formally employed, member of a pension fund and retirement annuity
• 35 years old
• Earning R 25 000/ month
• Contributing R1 000 per month to a retirement annuity
Pensionable Taxable Income
Non-Pensionable Taxable Income
Fringe benefits
Taxable income / Total Remuneration
Employer contributions into pension fund
Employee contributions into pension fund
Retirement annuity contributions
Tax Refund from RA
Tax refund from pension fund
CURRENT
R 300 000
R 30 000
R 330 000
R 22 500 (7.5%) 2
R 22 500 (7.5%)
R 12 000
R1 395
R6 975
FROM 1 MARCH 2016
R 330 000 (remuneration)
R 22 500 (remuneration)
R 352 500
R 22 500
R 22 500
R 12 000
R3 720
R6 975
Having made no changes to their pension fund contributions, a customer making
contributions to a retirement annuity could automatically benefit from a higher tax
deduction from their RA contributions.
2
22 500/300 000= 7.5%
Pension fund contributions prior to 1 March 2016 are calculated on pensionable taxable income