Finance Minister Pravin Gordhan. (Picture: AFP) ~ AFP
Cape Town - Employer contributions to employee retirement funds will be treated as a taxable fringe benefit in the hands of the employee from March next year, Finance Minister Pravin Gordhan announced on Wednesday.
Tabling his 2013 Budget in the National Assembly, he said individuals would be allowed, from that date, to deduct up to 27.5% of the higher of taxable income or employment income, for contributions to pension, provident and retirement annuity funds.
The maximum annual deduction would be R350 000. Contributions above the cap would be carried forward to future tax years.
Gordhan said tax-preferred savings and investment accounts would be introduced in 2015.
Retirement funds would be required to identify appropriate preservation funds for exiting members, who would be encouraged to preserve their pensions when changing jobs.
Retirement funds would be required to guide their members through the process of converting savings into a regular income after retirement, and to choose or establish default annuity products that meet appropriate principles and standards.
More competition would be promoted by allowing providers other than life offices to sell living annuities.
The tax treatment of pension, provident, and retirement annuity funds would be simplified and harmonised.
Governance reforms of retirement funds would also be implemented, with measures in place to ensure trustees of retirement funds aere trained once they have been appointed.
"I intend to call up a conference of all trustees this year to take this process forward," Gordhan said.
"We are also considering how to encourage all employers to provide appropriate retirement mechanisms for their employees, as part of the broader social security reforms," he said.
According to the 2013 Budget Review, also tabled on Wednesday, tax treatment of contributions to pension, retirement annuity and provident funds will be harmonised, allowing provident fund members to receive a tax deduction on their own contributions.
Vested benefits will be protected: balances in provident funds at the date of implementation, and subsequent growth, will not be required to be annuitised.
However, subject to public consultations, future contributions made to provident funds after an agreed date will be subject to the same annuitisation requirements applicable to retirement annuity and pension funds.
This requirement will not apply to provident fund members older than 55 years at the date of implementation.
New employees can still join and contribute to existing provident funds, and new funds can be created subject to the same tax and annuitisation rules.
This will reduce the complexity of the retirement system significantly.
Contributions in excess of the annual caps may be rolled over to future years.
At retirement, where any non-deductible contributions remain, they will be set off against any lump sum or annuity income before tax is calculated, to avoid double taxation.
Specific provisions will need to be made for defined-benefit pension plans and will require further engagement with industry.
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Budget section for full coverage of Finance Minister Pravin Gordhan's
National Budget speech.