South Africa has had a persistently low savings rate in the last two decades. In 2014, our gross (that is household, government and corporate) savings rate stood at about 15% of GDP and it is reported that only about 5% of South Africans save enough to be able to retire adequately.
To curb this, the National Treasury has promulgated reforms in the recent Tax Laws Amendment Acts which are aimed at encouraging saving towards retirement through further tax deductions and the promotion of annuitisation.
The so called T-day, or 1 March 2016 implementation day, is likely to spark a surge of renewed interest in income tax deductions and capital accumulation for retirement. This is because the T day reforms provide for a new uniform and improved deduction regime for members of pension, provident and RA funds.
It is important to note that the annuitisation requirements for provident fund members are to be delayed so, in effect, the amendments will not deal with a change to the current annuitisation regime for retirement funds.
TAX
The new law allows for a 27.5% (of the greater of member’s remuneration or taxable income) tax deduction on the combined contributions up to R350 000 in total per year made to an individual’s pension, provident and retirement annuity funds. This constitutes a significant improvement of the existing deductions enjoyed by pension fund and RA fund members and a vast improvement in the deduction regime for provident fund because, before T Day provident fund members were never afforded a deduction for their contributions.
ANNUITISATION
Until 1 March 2018, provident and provident preservation funds will continue to be subject to different annuitisation rules to those imposed upon pension and retirement annuity funds in that members of provident and provident preservation funds will continue not have to annuitise their retirement benefits up until that point. The delayed proposals in respect of Provident fund annuitisation will be reviewed in 2018.
On retirement, members of pension and retirement annuity funds will be allowed to take a third of their funds in a lump sum, and the remaining two thirds must be annuitised – placed in a fund that releases money on a regular basis. This however will not apply where the amount at retirement is below R247 500.