Retirement reforms explained

Only about 5% of South Africans save enough to be able to retire adequately, according to Brian Butchart, MD at Brenthurst Wealth. 

Hence pensioners often run out of retirement savings prematurely and become dependent on relatives or government grants.

To curb this, National Treasury proposed reforms aimed at encouraging saving towards retirement.  

Treasury’s amendments mean that, by default, your retirement savings will be preserved when you change jobs and your benefit will be converted to an annuity when you retire, rather than the current situation where your money gets paid out as cash by default, explains Hugh Hacking, head of Old Mutual Corporate Consultations.

Provident fund members who resign from their jobs will however still be able to take all their retirement savings as a cash lump sum upon resignation, with tax implications.

Alternatively they can preserve their money with a financial institution, or previous or new employer – without tax implications, to motivate people to save. 

However, at retirement, provident fund members will also be required to convert at least two-thirds of their retirement savings into an annuity or pension, instead of receiving a large one-off sum of cash.  

Tax implications

Starting from March 2016, Treasury will harmonise tax treatments of retirement fund contributions in provident, pension and retirement annuity funds.

Tax deduction benefits will be extended to provident fund members as well, but the tax-deductible contribution will be capped or limited to 27.5% of the taxable income or R350 000 per annum for high-income earners.  

All growth, interest and dividends earned in either the pension, provident or retirement annuity is tax free, says Butchart.

Treasury also proposed that pension and provident funds have a preservation fund to preserve their benefits when resigning from a job.

There is currently no preservation fund policy. There is also no effective date of implementing such a policy.

Retirement annuity funds have a preservation fund where one cannot withdraw funds until at least the age of 55. 

What happens if your company does not have a compulsory retirement fund? 

A retirement annuity (RA) is a good option, says financial adviser at Brenthurst Wealth, Renee Eagar.

“An RA is such a good tax-efficient vehicle. When you contribute to an RA you get a tax reduction, there is no capital gains tax [and] no retirement fund tax within an RA. So what this means is your money is growing at a real return without having to take taxation into consideration.”

This article originally appeared in the 12 November 2015 edition of finweek. Buy and download the magazine here.