You need to gear up
your retirement planning to meet T-Day and P-Day, when government will
implement major changes to the R3-trillion retirement savings industry.
T-Day and P-Day are
days when retirement fund reforms are scheduled to be implemented in or after
2015, with legislation based on government’s latest proposals for retirement
reform being put before Parliament this year. The proposals are outlined in a
discussion paper titled “2013 Retirement reform proposals for further
consultations”.
This latest
discussion document, released this week with the Budget, consolidates reaction
to four discussion documents published last year on various aspects of
retirement reform, including the preservation and taxation of retirement
savings.
Apart from T-Day
and P-Day, a number of other reforms will be implemented to boost the
protection of your retirement savings, including the enforcement of better
behaviour by your retirement fund trustees and measures aimed at reducing
costs. The reforms also propose to bring statutory funds, such as the
Government Employees Pension Fund and the Transnet funds, under the ambit of
the Pension Funds Act, giving members the rights enjoyed by members of
non-statutory pension funds.
T-Day
The recommendations
for the still-to-be-set T-Day will affect the taxation of your retirement fund
contributions. The recommendations change those made last year by Finance
Minister Pravin Gordhan, which were scheduled for implementation on March 1,
2014. The latest recommendations are:
* Your employer’s
contributions will be added to your taxable income as a fringe benefit;
* You will be able
to deduct both your and your employer’s contributions to a pension fund,
provident fund or retirement annuity (RA) fund up to 27.5 percent of the
greater of remuneration or taxable income;
* The premiums you
pay on group risk insurance will be included in the amount you may deduct from
your taxable income;
* There will be a
rand cap of R350 000 on the total amount you may deduct from your taxable
earnings in any tax year;
* Contributions in
excess of the annual cap may be rolled over to future years when you may not
reach the cap amount;
* Any
non-deductible contributions will be added to your tax-free lump sum at
retirement; and
* From T-Day, any
new contributions made to a provident fund will be subject to the same
annuitisation rules as pension funds, namely that at least two-thirds of the
savings must be used to purchase a pension at retirement. Any provident fund
savings made before T-day, and any investment growth on those savings, will not
be subject to the new pension purchase requirement.
P-Day
Government is
proposing tighter controls on preserving retirement savings, but it will allow
you to access savings before retirement during periods of unemployment.
However, vested
rights will be protected to avoid a repeat performance of people resigning
their jobs or getting divorced to get their hands of their retirement savings.
Recommendations for
the preservation of retirement savings are:
* From P-Day, all
retirement funds will be required to identify a default preservation fund to
which members’ savings can be transferred if they withdraw from the fund before
retirement. The use of an existing retirement fund to preserve savings for
retirement is already a no-cost option for members who, if the fund rules
allow, can stay on as deferred members with their savings protected and growing
until normal retirement age. However, currently, no withdrawals are allowed.
This will change with the new withdrawal rules.
* Currently, you
are limited to one withdrawal from a preservation fund before retirement, but
the withdrawal may be 100 percent of your savings. The new proposal is to allow
for an income stream in periods of unemployment, allowing for one withdrawal a
year.
* Withdrawals will
be based on a formula. The proposed annual withdrawal will allow members of
preservation funds to withdraw an amount that is the greater of the state old
age grant (R1 260 from April 1) or 10 percent of their initial preservation
fund deposit, excluding any portion to which vested rights apply. Any unused
withdrawal amounts may be carried forward to future years.
* From P-Day,
retirement fund divorce settlements will be subject to the proposed new
preservation withdrawal rules allowing for a limited income stream.
Consideration is
also being given to relaxing the preservation requirements of RA funds, from
which you currently cannot make any withdrawals before the age of 55. (When you
do reach 55, two-thirds must be used to purchase a pension).
Treasury is
considering allowing RA fund members to transfer their balances to preservation
funds, under conditions that will prevent them from seeking out additional tax
advantages. The conditions may include preventing individuals who have
transferred money out of an RA fund from rejoining that fund, or,
alternatively, from receiving a tax deduction in respect of any RA
contributions, for a period.
TREASURY INTENT ON OVERHAUL OF LIVING ANNUITIES
Investment-linked
living annuities (illas) are due for a major overhaul to ensure that pensioners
using them are not left financially destitute before they die because of high
costs, poor advice, wrong investment choices and drawdown rates that are too
high.
Life assurance
companies are set to lose their stranglehold on the provision of illas, with
government proposing that the requirement of a life assurance licence to sell
illas be dropped.
It is proposed that
collective investment scheme management companies such as unit trust and
exchange traded fund companies be allowed to sell illas without, as they
currently need to do, registering as a life assurance company or renting a life
assurance licence.
National Treasury
hopes this will increase competition and bring down costs.
It says most
respondents to an earlier discussion paper pointed out that an important factor
underlying the choice of annuity at retirement was that people with a low level
of savings tended to choose illas in the hope that, because they allow for
higher initial pension payments than conventional annuities, they could
maintain their living standards.
Most respondents
were in favour of reforming, rather than replacing illas.
Treasury says:
* Many of the
difficulties associated with illas may be direct or indirect consequences of
the ways in which intermediaries, including investment platforms, are paid. The
Financial Services Board (FSB) is already investigating these costs as part of
its Retail Distribution Review on commissions paid for financial products,
including illas. This review will include an investigation into the payment of
rebates by collective investment schemes to linked-investment service
providers, which are currently the main source of illas.
Illas are also part
of the scope of the Treating Customers Fairly initiative.
* Consideration is
being given to easing rules on using multiple types of pensions to allow
retirees to choose different combinations from existing, relatively
well-understood pension products.
* Proposed default
illas, whether provided within or outside a retirement fund, will be
permissible as a default option only if they meet strict conditions, including
design criteria and limits on investment choices, drawdown rates and costs.
Collective investment scheme managers will also be able to provide retirement
funds with default illas, provided they meet the conditions.
Treasury says the
progress of these reforms will be monitored through detailed compulsory
reporting by product providers on annuity (pension) purchases made by
individuals retiring from funds, investment charges and the asset mix of illas,
and the purchase prices and terms of conventional annuity policies.
GOVT PONDERS COMPLEXITY OF SECURITY FOR LOW EARNERS
Government must
still spell out the details of how it intends extending the retirement system
to all employed individuals, particularly those in low-income groups and in
irregular employment, who are mainly excluded from the current system and rely
entirely on the social old-age grant, which will be increased from R1 200 to R1
260 a month.
The Budget Review
says the retirement reform proposals released with the Budget “will lay the
foundation for the eventual introduction of a mandatory tier of a comprehensive
social security system that provides death, disability and retirement cover to
all workers”.
The backbone of the
extended system is likely to be the proposed National Social Security Fund
(NSSF).
Patrick Craven,
spokesperson for trade union federation Cosatu, in reacting to the Budget
proposals, says the federation is increasingly frustrated by government’s
failure to introduce comprehensive social security that will ensure that nobody
falls through the safety net.
Cosatu also rejects
the piecemeal reforms of the retirement funding system and wants retirement
reform to be part of comprehensive social security reform.
But in its
discussion paper, Treasury says the situation is complex. Currently, about half
of formally employed workers are members of an employer-sponsored retirement
fund. An analysis based on a labour force survey carried out in 2010 by the
Centre for Research into Economics and Finance in Southern Africa indicates
that 86 percent of workers who don’t belong to retirement funds earn less than
the tax threshold, indicating that they receive no tax benefit for saving for
retirement. Of these, nearly 40 percent work in sectors where employment can be
erratic.
Source: IOL personal finance
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