You may have heard that there have been retirement reforms in South Africa, but unless you’ve had these reforms clearly explained, you are probably uncertain about what they might mean for you. We asked Anton Kriel, the director of tax at Grant Thornton Western Cape, to answer our questions about what retirement reform means for South Africans. These were his answers:
Why have retirement rules and taxation been reformed?Retirement regulations have been reformed to bring about what they call “vertical harmonisation”, which means that whatever income bracket you are in, you get treated equally in terms of taxation. Another reason is what they call “horizontal harmonisation”, which means that whichever retirement product you are investing your money in, your contributions will be tax deducted and your income from the fund will be taxed in the same way.
The reforms essentially intend to make the playground fair for everyone earning an income and saving for retirement in South Africa.
What are the different types of retirement products? There are three different types of retirement products:
- Pension funds, provided by the employer and contributed to by both the employer and the employee.
- Provident funds, provided by an employer and generally only contributed to by the employer for the benefit of employees.
- Retirement annuities are retirement products taken up by individuals, which were created to provide them with the same tax breaks as they would receive if they were contributing to employer funds.
Under the old system, the different products had different taxation rules. Retirement reform has been implemented so that no one product provides better tax benefits than another – whether you belong to a company retirement fund or are saving for your future yourself through a retirement annuity.
How do the rules of these retirement products differ now? Whether you are invested in a pension fund, provident fund or retirement annuity, the rules around tax deductibility and withdrawal benefits are now identical. All retirement contributions are deductible up to 27.5% of the higher of the individual’s salary income or taxable income. This means that whatever product you are using to save for your retirement, you can save up to 27.5% of your income and you won’t pay income tax on that amount. The distinction between taxable income and salary income is in place so that if, for instance, you have a salary but you also earn money from letting an apartment, your taxable income will be higher. The maximum deduction allowed is R350 000 per year.
What is the controversy around the reforms affecting provident funds? One of the more difficult areas of retirement reform has been around what happens with provident funds at the age of retirement. Both pension funds and retirement annuities have allowed for one third of the capital to be withdrawn as a lump sum and the other two thirds to be used to purchase an income, which means they are invested and a certain amount can be withdrawn each month. On the other hand, the total capital from provident funds could be drawn as a lump sum at retirement and taxed at a lower rate than the retiree’s marginal income tax rate. This meant that high-income provident fund investors benefitted substantially from the tax break, but lower-income investors, who weren’t taxed that highly to begin with, would receive a lump sum that would be unlikely to last them very far into their retirement.
When the retirement reforms came into effect on 1 March 2016, provident funds were supposed to be brought into line with the other two products – with only a one third withdrawal being permitted upon retirement and the remainder being used to purchase an income. However, because of serious objections being put forward by unions and other role players who feel that provident fund members are being denied access to their full lump sum, the introduction of this particular reform has been delayed until 2018. It is hoped that by this time, the retirement-planning benefits of this reform will be properly understood.
The bottom line The retirement reforms have been put in place to ensure that retirement rules and taxation are handled equitably, so that the very rich aren’t unduly benefited and the less fortunate are provided with a platform to enhance their post-retirement income. While there is some controversy around the provident fund benefits, overall the reforms represent fair and equitable changes to a system for the greater benefit of all.