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Retirement Central™ - Retirement Reform

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Executive summary
 
 

 

It is becoming ever clearer that employers which take greater responsibility for the overall financial well-being of their workers, including through the design of their retirement funds, reap the rewards of a more stable and happier work force.

 

The overall approach of these policy proposals is therefore to alter the defaults implicit in retirement fund design, where appropriate, to nudge, rather than force, individuals into making decisions which serve their long-run interests.

 

Taxation of retirement funds

 

  • From an effective date, on or after 2015, called T-day, employer contributions to retirement funds will become a fringe benefit in the hands of employees for tax purposes. Individuals will be able to receive a tax deduction on employer and employee contributions to a pension fund, provident fund or retirement annuity fund up to 27.5% of the greater of remuneration and taxable income. A ceiling of R350 000 will apply. This proposal is described in more detail in Chapter 4 of the Budget Review.

 

Governance

 

  • The duties of trustees to act independently, and free from conflicts of interest, will be strengthened by elevating PF Circular 130, which deals with the governance of retirement funds, to a Directive. A draft will be published for consultation later this year.
  • The FSB is to monitor trustee appointments, including ensuring that trustees meet ‘fit and proper’ requirements.
  • The current Trustee Toolkit may be elevated into a basic, independent, compulsory and free training kit for Trustees.
  • The Financial Services Laws General Amendment Bill, 2012, which contains various provisions pertaining to governance, is currently in Parliament.
  • The Minister is to convene a trustee conference, with a view to further strengthening the governance of retirement funds.

 

Preservation

 

  • Full vested rights with respect to withdrawals from retirement funds will be protected. Amounts in retirement accounts at the date of implementation of the legislation, called P-day, and growth on these, can be taken in cash, but from a preservation fund, and subject to taxation as currently.
  • After P-day, all retirement funds will be required to identify a preservation fund and transfer members’ balances into that fund, or another preservation fund, when members withdraw from the fund before retirement.
  • Existing rules on preservation funds will be relaxed to allow one withdrawal per year, but the amount of each withdrawal will be limited. Unused withdrawals in any year may be carried forward to future years. Withdrawal limits will account for vested rights as described above.
  • Payments resulting from divorces will also need to be paid into preservation funds rather than being paid in cash.

 

Annuitisation

 

  • The annuitisation requirements of provident funds and pension funds will be harmonised. However, the new annuitisation rules will only apply to new contributions made to provident funds after P-day, and growth on these contributions. Existing balances in provident funds, and growth on these, will not be subject to annuitisation.
  • In addition, members of provident funds who are older than 55 on the date of implementation will not be required to annuitise any of their balance at retirement, provided they remain in the same provident fund until they retire.
  • To lessen the impact on provident fund members, the means test for the old age grant will be phased out by 2016, and the de minimis requirement for annuitisation will be raised from R75 000 to R150 000.
  • Trustees will be required to guide members through the retirement process, to identify a default retirement product in accordance with a prescribed set of principles, and to automatically shift members into that product when they retire, unless members request otherwise. The fund itself may provide the default product, or it may use an externally-provided product.
  • Living annuities will be eligible for selection as the default product, provided certain design tests, including on charges, defaults, investment choice and drawdown rates, are met.
  • Trustees that make commission-free financial advice available to members on retirement, paid for out of the fund on a salaried basis, will be given some legal protections in respect of the choice of the default. To increase competition, providers other than registered life offices will be allowed to sell living annuities.

 

Non-retirement savings

 

  • Government intends to proceed with the implementation of tax-preferred savings and investment accounts. All returns accrued within these accounts and any withdrawals would be exempt from tax. The account would have an initial annual contribution limit of R30 000 and a lifetime limit of R500 000, to be increased regularly in line with inflation. The new accounts will be introduced by 2015, and will co-exist with the current tax-free interest income dispensation.
  • With effect from 1 March 2013, tax-free interest-income annual thresholds will be increased from R33 000 to R34 500 for individuals 65 years and over, and from R22 800 to R23 800 for individuals below 65 years. These thresholds may not be adjusted for inflation in future years.

 

Broader reforms

 

  • In addition to the proposals described above, Government is exploring ways to increase retirement fund coverage to all workers. This is a complex issue, given the large proportion of uncovered workers who earn below the tax threshold, who work for small employers, or who have a tenuous connection to the formal labour force, for instance because they work in construction or domestic service.
  • A process is currently underway to bring public pension funds currently not governed under the Pension Funds Act, including the Government Employees Pension Fund (GEPF), Transnet, Telkom and Post Office retirement funds, into the purview of the Act.
  • Any biases in retirement funds which may discourage individuals from working past the retirement age of their funds will be identified and removed.

 

Important dates Date

Balance

31st May 2013

Formal consultation period on this document closes

Remainder of 2013

Legislation implementing these changes introduced

P-day

Preservation rules change for all retirement funds (expected to be on or after 2015)

T-day

Taxation rules and annuitisation requirement harmonised across all retirement funds (expected to be on or after 2015)

 

Source: http://www.treasury.gov.za/documents/national%20budget/2013/

 

 

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