Budget gives clarity to the retirement industry

2016-02-25 16:48 - Carin Smith
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Cape Town - The confirmation in Budget 2016 that specific rules of the Tax Law Amendment Act have been postponed, while other rules will still come into effect as of March 1 2016, provide the retirement industry clarity on a way forward after recent indications of a possible delay, according to Hugh Hacking, head of Old Mutual Corporate Consultants.

The Revenue Laws Amendment Bill 2016, introduced in the Budget 2016 speech, gives effect to the decision by Cabinet last week to postpone the annuitisation requirement for provident fund members by a further two years. This will allow for further consultation with key stakeholders, in Hacking's view.

“The annuitisation requirement would have required certain provident fund members, depending on their retirement savings amount among other aspects, to purchase a pension (annuity) to provide them with a monthly income,” he explained.

The retirement reforms related to tax harmonisation of retirement funds is set to become a reality on March 1 2016. Members of all approved funds - pension, provident and retirement annuity funds - will now be afforded a contribution deduction of 27.5% of the greater taxable income or remuneration, subject to a yearly maximum of R350 000.

“The effects of this will impact members differently. For some members, it will mean an increased take-home pay, while for others there won’t be much of a difference. This will very much depend on a member’s personal situation," said Hacking.

The de minimis annuitisation amount will also be increased from R75 000 to R247 500 for pension fund members.

“This will mean that pension fund members will now be able to take home a larger lump sum before buying an annuity. This aspect of the reform has been postponed for provident funds until a decision has been reached by government and National Treasury,” said Hacking.

South Africans can save more

Rowan Burger, managing executive: strategy and market development at MMI Corporate and Public Sector, told Fin24 many working South Africans will be able to save more to retirement funding arrangements at the increased 27.5% of taxable income, despite the proposed capping of tax deductibility at R350 000 per annum affecting high income earners remaining.

"There is a provision that the limit will be averaged, allowing unused deductions to be caught up in subsequent years and overspent deductions to be recouped," said Burger.

In his view, the increase to R247 500 of the maximum amount allowed for cashing in the full annuity should have been reduced back to R75 000 with the removal of the annuitisation proposal. This is because it should become a concession with its future reintroduction, he pointed out.

"Because the nature of pension and provident funds remains different, the consolidation of these types of funds will remain on hold until the annuitisation impasse is resolved, meaning there remain more unnecessary administration costs in the system," said Burger.

In his view there were some changes in Budget 2016 which are good for savers. Yet, the change in the interest rebate allowance coupled with an increase in the inclusion rate of capital gains tax, actually discourages saving.

"This means that when you are selling a share, you are going to give much more back to the Fiscus in terms of any growth in a share price. What this also means is that it becomes more attractive to save in tax sheltered investment vehicles," said Burger.

In his view, people should still look to save in tax free savings accounts, pension funds and retirement annuities. High net worth individuals, should look at saving in endowments.

There maximum tax deductable contribution of R350 000 per year leaves high net worth individuals who save more than R350 000 per year in an interesting position, he pointed out.

This is because high net worth individuals are going to be better off saving in a pension fund and not getting a tax deduction on their contributions, rather than taking that money and saving it in a discretionary unit trust where they will pay tax on interest and capital gains at this new higher rate, explained Burger.

Increase in debt servicing costs

MMI economist Sanisha Packirisamy told Fin24 debt servicing costs are still going to increase. It remains one of the fastest growing expenditure items, in her view, as it crowds out other expenditure.

Looking at budget aspects like the real average growth in employee wages, the increase in social grants in real terms and the surplus in the Unemployment Insurance Fund, Packirisamy said it shows the government still wants to protect the workers.

"Consumers have not been as hard hit as expected, but in my opinion Treasury is paving the way for further tax increases in the next fiscal year," she said.


Sandra Woest, senior manager at Henley & Partners SA - specialists in residence and citizenship planning - welcomed the announcement by Gordhan of the extension of the period for the amnesty for South Africans with undisclosed assets abroad.

"In essence, this means that people have about a year from now to disclose their offshore assets that have been taken out of the country in an unauthorised manner," she said.

"With investors looking more and more for alternative investment opportunities, including investments globally, it is important for the government to encourage citizens to take advantage of the offshore allowances by using the channels set up by the State to do so."

Anthea Scholtz, tax partner at Deloitte, also emphasised that Gordhan confirmed that the implementation of the changes relating to the preservation of retirement savings in provident funds would be postponed until March 1 2018.

She added that all other retirement reform changes will, however, go ahead and be implement on March 1 2016 as planned. This means the tax changes relating to the taxability of employer contributions and the tax deductions which employees may claim will be effective March 1 2016.

Push to bring down savings costs

Steven Nathan, CEO of 10X Investments, said it is encouraging to see that, despite the set-backs in legislating compulsory annuitisation for provident funds, government remains committed to transforming the savings industry. In his view this is to better serve the needs of investors.

"We welcome the push to bring down the cost of saving, which we believe will reflect in the regulated specifications for default saving, preservation and annuitisation products. The sooner these are legislated, the better off savers will be," said Nathan.