THE signing into law of changes to the tax treatment of retirement funds has sparked an uproar from the Congress of South African Trade Unions (Cosatu).
The aim with the retirement reforms — which will be effective from March — is to create a simpler and more uniform regime that will ensure the preservation of a large portion of retirement savings post-retirement.
Cosatu is of the view that no government has a right to unilaterally decide for workers, how and when to spend their retirement savings.
South Africans have been branded the worst savers in the world. Figures supplied by Statistics SA and Trading Economics show that the household saving rate in SA decreased to -2.30% in the third quarter of last year from -2.20% in the second quarter of the same year.
By contrast, personal savings in several countries increased last year. In the Czech Republic it increased to 10.41% (9.27), in Kenya to 11% (10%) and Portugal to 6.64% (2.2%).
The household savings rate refers to the income saved by a household during a certain period of time. Personal savings averaged at 5.04% from 1960 to 2015 in SA.
The Treasury says in the explanatory memorandum on the 2015 Taxation Laws Amendment bill, the broader objectives of the reforms are to ensure more equity across income groups.
Beatrie Gouws, associate director at KPMG, says the current regime is open to abuse where employers and individuals contribute “massive amounts” to retirement funds in order to obtain tax deductions.
“The higher the expense on the incentive (tax deductions), the less money there is to spend on education and social security. In short, although the incentive is necessary to encourage people to save for their retirement, abuse of the incentive affects the whole country.”
Cosatu said in its statement that retirement savings were part of workers’ hard-earned salaries and should be accessible to the workers, as and when they needed them, especially in the absence of a comprehensive social security.
“It is unacceptable that when we ask to be given a comprehensive social security and retirement reform discussion paper, which government has failed to deliver for more than 10 years, we get given the Taxation Laws Amendment Act,” the union says in its statement.
Ms Gouws says in the absence of this paper — regardless of one’s views of whether the country can afford it — it is unsurprising that Cosatu feels that the government is not acting in good faith.
Deloitte associate director Jaco le Grange, says statements made by Cosatu that the changes amount to the nationalisation of worker’s pensions are clearly untrue.
“People will not lose their pension, but they need to get sound financial advice about their investment options.”
Keith Engel, deputy CEO of the South African Institute of Tax Professionals, says owners of provident and other pension funds remain exempt from the two-thirds annuity limitation if the funds are withdrawn before retirement (and up to R247,000 afterwards).
“More importantly, money supposedly trapped in funds can hardly be said to be nationalised. Workers remain the sole owners of fund money with all growth being theirs. Nothing in the law allows the government to expropriate the funds for different uses.”
Mr Gouws adds that deferred wages, in the form of a lump sum, dry up soon after retirement, with far too many workers ending up on social security.
The requirement to purchase an annuity on retirement will, in future, apply to all members, including pension, provident and retirement annuity funds.
“This implies that on retirement, members will be required to take one-third of their retirement benefit as a lump sum and the two-thirds of their retirement benefit will be paid to them every month as an annuity until they die”, the Treasury said in its explanatory memorandum.
Ms Gouws explained that the changes effective from March 1 seek to migrate the current lump-sum provident fund dispensation to an annuitisation (annual payment of an allowance or income) dispensation, but “at a snail’s pace”.
Ms Gouws added that the vested rights of existing members were protected. Members who were 55 years and older who remained on the provident fund, would not have to annuitise any contributions to that provident fund, whether the contributions were made before or after March 1 2016.
All other provident fund members only have to annuitise contributions made from March 1 2016 to a provident, pension and retirement if the total amount exceeds R247,500.
Mr La Grange said a question that needed consideration was what the long-term effect would be on the cost structures of pension funds.
People who contributed “massive amounts” in order to obtain the tax deductions might reconsider their investments options, as contributions to pension and provident funds beyond the stated threshold would become a taxable fringe benefit.
Changes from March 1 2016:
(a) Contributions by both employers and employees to pension, provident and retirement annuity funds will qualify for a tax deduction, capped at the lesser of 27.5% of the greater of taxable income or remuneration; or R350,000 per annum.
(b) Contributions by employers to pension, provident and retirement annuity funds on behalf of employees will become a taxable fringe benefit in the hands of the employee.
(c) The requirement to purchase an annuity will apply to all members, including pension, provident and retirement annuity funds. This implies that on retirement, members will be required to take one-third of their retirement benefit as a lump sum and the two-thirds of their retirement benefit will be paid to them every month as an annuity until they die.
(d) Vested rights are preserved and those members older than 55 years are exempted from the requirement to annuitise.
(e) In turn, the de minimis threshold is increased from R75,000 to R247,500. This effectively means that members of pension, provident and retirement annuity funds who do not have a retirement benefit exceeding R247,500 at retirement will not be required to annuitise. Only members who have a retirement benefit of R247,500 will be required to annuitise.