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This week, President Jacob Zuma signed into law the 2015 Taxation Laws Amendment Bill, which affects the tax treatment of retirement funds.
Personally, I am relieved that the bill has finally been passed after a year of delays. Unfortunately, there has been a lot of noise and false information spread about these changes, which are, on the whole, extremely beneficial for individuals saving towards retirement.
For me, a key change is the standardisation between all retirement products, which means that whether you are saving in a retirement annuity, a pension fund or a provident fund, the same rules will apply. The various rules around these products made it challenging for the average retirement member to understand the tax implications and rules around their selected product.
From March 1, irrespective of whether you are saving in a retirement annuity, provident or pension fund, you will be able to save up to 27.5% of all your income for retirement, tax-free.
The restrictions around only being able to contribute based on your “pensionable salary” will also fall away, which means individuals will be able to save even more as the “pensionable salary” was calculated at about 75% of your total salary.
Now, maybe if you are struggling to meet even the existing limit of about 15%, this will not mean that much to you, but for someone closer to retirement who has realised they have been undersaving, this provides an excellent opportunity to top up their retirement fund.
Government has, however, limited the maximum amount you can contribute in a year to R350 000. This means anyone earning more than R1.2 million will be capped at a maximum of R350 000 tax-free retirement savings. This will have a negative effect on higher-income earners.
Due to the standardisation of the tax rules, you can now consolidate your preservation funds. If you are one of the minority who has preserved your retirement funds when changing jobs, you probably find that you have several preservation funds all attracting administration fees.
You will now be able to consolidate all those funds into a single, cost-effective product.
You can also transfer your retirement money between funds, which should make it easier to preserve your retirement funds. For example, if your current employer offers a pension fund and your new employer has a provident fund, you can still transfer your existing funds to the new employer’s fund, tax-free.
Now to the more contentious issues that led to many false rumours. To bring provident funds in line with pension funds and retirement annuities, a provident fund member will no longer have the option of cashing in the full value of their fund on retirement.
They will be required, as a pension fund and retirement annuity member, to buy an annuity income with two-thirds of the capital.
If this worries you, it is worth noting that this only applies to future contributions, so any money that you have accumulated in your provident fund up to March 1 2016 will still be available on retirement as a full cash payout if you wish.
So it makes no sense to cash in your provident fund now if you are concerned about accessibility, because the funds you have accumulated are still fully accessible.
In fact, government has gone a step further to reassure those close to retirement – if you are a member of a provident fund and are 55 or older on March 1, you will still be able to access your full provident fund at retirement, even those contributions made after March 1. This, however, only applies if you remain with the same provident fund.
It is also worth noting that if your fund is worth R150 000 or less, irrespective of which retirement product you are invested in, you will be able to take the full amount on retirement.
Based on these amendments, I have to confess to being completely confused about Cosatu’s reaction to these changes and its assertion that this is a “nationalisation” of pensions, especially because there is no mention of compulsory preservation.
While compulsory preservation when changing jobs has been discussed, this does not form part of this bill and is, at this stage, not being considered.
Treasury is hoping that these new measures, which also include making it easier for individuals to preserve their retirement funds, will see an improvement in our retirement savings levels without having to legislate further on preservation.
