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Members of Retirement Funds

As a retirement fund member you can expect changes to the rules of your fund.

However, there’s no need to be concerned, as your money will be safe and you should be able to use these changes to the rules to your advantage. Here's how it works

The Changes Explained

As of T-Day, these two main changes will apply to your retirement savings.

The same tax rules will apply to pension funds, provident funds and retirement annuities.

How will this affect you?

  • From T-Day onwards, you will be able to get a total tax deduction on your contributions to all types of retirement funds of up to 27,5% of your salary (or taxable income).

    Remember, you may contribute more than 27,5% of your salary to your retirement savings, but you can only claim a tax deduction up to the maximum of 27,5% of your salary and limited to a maximum tax deduction of R350 000 per year.

    If your contributions exceed 27,5% and/or R350 000 in a tax year, you will be able to claim the balance (which you couldn’t claim in the current year) the following year(s). Any balance remaining when you retire or withdraw from service may be taken as a tax-free lump sum or be deducted from the tax payable on your annuity (pension).
  • Currently you and your employer make separate contributions to your pension and provident fund. However, as of T-Day, your employer contribution will be added as a fringe benefit to your salary.

    This shouldn’t have any effect on your take-home salary. In fact, if you make member contributions to a provident fund, you will now enjoy a tax deduction and an increase in your take-home salary.

The provident fund withdrawal rules at retirement will become more like pension funds.

How will this affect you?

If you have a pension fund, this will have no effect on you.

If you have a provident fund and are 55 years or older on 1 March 2016, this will have no effect on you, as long as you stay in the same provident fund until you retire.

If you have a provident fund and are younger than 55 years on 1 March 2016, you will have to member shares:

  • Member share 1: This will consist of all the contributions and growth in your fund on 29 February 2016, plus the future growth on this portion. If you are 55 years or older, you will still be allowed to take all your savings in a cash lump sum when you retire.
  • Member share 2: This will consist of all the contributions you will make from 1 March 2016, plus the growth it will earn. When you retire, you’ll be allowed to take one third of member share 2 in a cash lump sum and you’ll have to buy a pension with the remaining two thirds. However, if the total isn’t more than R247 500, you may take the entire amount in a cash lump sum.

Frequently Asked Questions

Whether you’re a pension fund or a provident fund member, the following frequently asked questions my help you address your biggest concerns.

 

Questions and Answers for Pension Fund Members

T-Day will harmonise and equalise the tax deductibility of your contributions to pension, provident and retirement annuity funds. As a result:

  • You can enjoy contribution flexibility for the first time.
    Most members who use a retirement calculator and discover they may not be saving enough for retirement are not in a position to increase their contributions at the moment – primarily because tax legislation doesn’t allow for this outside a total cost-to-company remuneration approach. However, from 1 March 2016 any member will be able to request an increase in contributions and will enjoy a tax deduction up to the new threshold (assuming their fund rules allow additional voluntary contributions).
  • Your pay slip will look different.
    Your employer’s contributions are seen to have been made by you and will be shown as a fringe benefit on your pay slip/IRP5. However, the amount will be deductible by you and you won’t be out of pocket - unless you contributed more than the new threshold of 27.5% of the greater of remuneration or taxable income, or more than the new maximum of R350 000 per year.
  • You can only make deductible contributions up to a maximum of R350 000 per year in future.
    T-Day may not be good news for fund members who contribute more than R350 000 per year to retirement funds. This may include members who earn more than R1 270 000 per year and make contributions of 27.5% of their remuneration. They will be entitled to the same percentage levels of tax deductibility but will be affected by the new rand cap or maximum deduction of R350 000 per year. This is a cumulative maximum for all member and employer contributions made to any retirement fund to which the member contributes. Therefore, higher income earners will have to aggregate their contributions, including those to retirement annuity funds, and decide on a strategy going forward. There are alternatives, but none as effective as making deductible contributions.
  • You can take a much greater lump sum at retirement.
    The de minimis amount has been increased from R75 000 to R247 500 for pension, provident, and retirement annuity funds. This means that if your retirement benefit, payable on or after 1 March 2016, does not exceed R247 500, you can take the entire amount in cash. This applies to each and every fund that you retire from. However, if the benefit is even just R1 more, you will be required to buy an annuity with two thirds of the amount.

Yes, you can. Whatever amount you could take as a lump sum if you resigned at the end of February 2016 and growth thereon, will continue to be available to you in cash whenever you resign in the future. The right to take your withdrawal benefit in cash is not affected by T-day.

No. The fact that employer contributions will be taxed in your hands as a fringe benefit is cancelled out by the fact that you as member will receive a deduction of up to 27.5% of your total remuneration (or your taxable income if that is higher) in respect of your own contributions as well as any contribution made by your employer. Before T-Day you only enjoyed a 7.5% employee contribution deduction while the employer enjoyed a deduction up to 20% in respect of its contributions.

To be able to benefit from the generous 27.5% tax deduction available to members from 1 March 2016, you need to increase you contributions to enjoy a greater tax deduction.

According to the Sanlam Employee Benefits Benchmark Survey the average contribution rate is in the order of 15% of pensionable annual remuneration (PEAR). Therefore, the average member has significant scope to increase tax deductible contributions.

There are three important considerations:

  • The maximum tax deduction percentages are effectively the same.

    The detail: Pension fund members now enjoy a 27.5% deduction in respect of all employer and employee contributions. Before T-Day the employer enjoyed 20% deduction and members a 7.5% deduction.

    The exception: A maximum deduction of R350 000 per year in respect of all retirement fund contributions has been introduced. That means that persons who earn more than R1 270 000 and contribute for example 27.5% of remuneration (not PEAR as discussed below) (R1 270 000 x 27.5% = R349 250) will be limited to the Rand cap of R350 000 per year. For high income earners the rand cap could also be reached even on a lower percentage than 27.5%.

  • Many members now enjoy contribution flexibility for the first time.

    This essentially means that a member can make additional voluntary contributions that, together with any other own and employer contributions to any other fund of which you are a member, are deductible up to 27.5%/R350 000 - if the fund rules provide for it.

    The detail: The old concept of a maximum additional voluntary contribution (AVC) deduction of R1 800 per year has been scrapped. When we talk about AVCs after T-Day we refer to the member’s ability to request HR to deduct an additional contribution over and above the normal compulsory contributions.

  • Thirdly, contributions are typically calculated on PEAR at the moment.

    The new 27.5% threshold is based on remuneration as defined in the Income Tax Act. These two concepts are very different. The detail: Remuneration includes all remuneration earned by an employee such as salary, fringe benefits, additional bonuses or commissions. The closest proxy for remuneration is total guaranteed package (TGP). Because PEAR is typically only 80% (or less) of TGP, there will be even more capacity to increase tax deductible contributions.

    Example: A 27.5% contribution based on PEAR is only a 22% contribution based on TGP if PEAR is 80% of TGP.
    If your TGP is: R 100 000
    And your PEAR is: R 80 000
    27.5% of PEAR is: R 22 000
    R22 000 is 22% of TGP

Any member can increase their contributions in order to address their retirement needs, if their fund rules allow it. It is recommended that members use the additional voluntary contribution or additional voluntary contribution (AVC) procedure for this purpose. Make a request to your HR office in writing to make an additional contribution to your fund, over and above the current employer and employee contributions. You’ll be able to review these additional contributions from time to time.

(Please remember that you can only make additional contributions via your employer’s payroll. A direct deposit into the fund’s bank account is not allowed.)

The detail: The old concept of a maximum AVC deduction of R1 800 per year has been scrapped. When we talk about AVCs after T-Day we refer to the member’s ability to request HR to deduct a greater contribution over and above the normal compulsory contributions.

For example, I am paying 7.5% and my employer is paying 30%. Would the difference of 10% be seen as a fringe benefit and taxed in my hands?

Any contribution paid by an employer is taxed as a fringe benefit and deemed to have been made by the member. Under a defined contribution fund the fringe benefit is equal to the amount of the contribution. Therefore, the total contributions made will be 37.5% (30% + 7.5%). Only 27.5% will be allowed as a deduction in one tax year for the benefit of the member.

The detail:Your employer contribution will be shown as a fringe benefit on your payslip/IRP5. Your employer will get a tax deduction for the full contribution in terms of section 11(l) of the Income Tax Act. However, the amount will be deductible by you (because it is deemed to have been made by you) as long as it does not exceed the new thresholds. If it is not fully deductible, you’ll be out of pocket since you’ll be paying tax on the contributions made above the new thresholds. However, upon your resignation or retirement you will enjoy tax relief in respect of contributions that were not deductible.

It is important to be clear on the amount that the contribution is calculated on. The 27.5% should be calculated on your remuneration or taxable income, whichever is the greater. The current 37.5% contribution you refer to is in all likelihood based on your PEAR.

The detail:PEAR is typically 80% of your total guaranteed remuneration (TGP) (but it can be less). If that is the case the correct calculation will be that a contribution of 30% of TGP was made -TGP being the closest proxy for remuneration.

Example 1:
If your TGP is: R120 000
And your PEAR is: R96 000
PEAR as a % of TGP is: 80%
37.5% of PEAR is equal to 30% of TGP (37.5% x 80%)
In this example you would be contributing 2.5% more than the maximum tax free contribution percentage and would therefore not receive a tax deduction for the additional 2.5% which is taxed in your hands as a fringe benefit.

Example 2:
If your TGP is: R120 000
And your PEAR is: R80 000
PEAR as a % of TGP is: 66.7%
37.5% of PEAR is equal to 25% of TGP (37.5% x 66.7%)
In this example your total contribution amount is below the maximum tax free contribution percentage and therefore you will be allowed to receive the full tax deduction. Any amount not deducted can be rolled over to a next year. So in example 1, the 2.5% additional contribution can be rolled over to a next year. The nominal value of amounts not rolled over will be available to be offset against any lump sum at withdrawal or lump sum or annuity benefit at retirement.

No action is necessary unless you make contributions of more R350 000 per year and prefer to make these investments outside the fund. In such a case the onus is on you to make sure that your total contributions do not exceed the 27.5% or the R350 000 per year threshold, by reducing your contributions.

The short answer is no.

Firstly, retirement funds are virtual tax havens. No income tax or capital gains tax apply in respect of the fund’s investments and death benefits are normally not subject to estate duty. You will not find a more tax-efficient saving vehicle in South Africa.

Secondly, retirement funds are wholesale operations that enjoy lower institutional prices and economies of scale. National Treasury is proposing a whole range of measures to reduce the costs even further.

Thirdly, retirement funds, as a form of contractual saving, are super convenient and efficient. Membership of and contributions to occupational funds are arranged, investments are made and benefits will be paid whether the member pays any attention to these or not. Benefits are also protected against creditors.

 

 

Questions and Answers for Provident Fund Members

A: T-Day will harmonise and equalise the tax deductibility of contributions to pension, provident and retirement annuity funds.

  • Employee contributions are deductible for the first time.
    You will now enjoy deductible member contributions of up to 27.5% of the greater of remuneration or taxable income for the first time, provided your fund’s rules make provision for such contributions. The 27.5% is cumulative in respect of all contributions made by or in respect of you to pension, provident and retirement annuity funds. In the past employer contributions were deductible up to 20% but employee contributions were not deductible. Therefore, if you make “member contributions” to the fund, you may enjoy a tax deduction and a greater take home pay. SARS data shows that around 1.25 million provident fund members who make contributions are above the income tax threshold and are likely to receive an increase in net pay.
  • Your pay slip will look different.
    Your employer’s contributions are deemed to have been made by you and will be shown as a fringe benefit on your pay slip/IRP5. However, the amount will be deductible by you and you will not be out of pocket - unless you contributed more than the new thresholds of 27.5% of remuneration or the new maximum of R350 000 per year.
  • You may enjoy contribution flexibility for the first time.
    Most members who run a retirement calculator and discover that they are under- provided for are not in a position to increase their contributions at present – primarily because tax legislation doesn’t allow it outside a total cost to company remuneration approach. From 1 March 2016 any member will be able to request an increase in contributions and will enjoy a tax deduction up to the new threshold (assuming the fund rules allow for additional voluntary contributions).
  • You can only make deductible contributions of a maximum of R350 000 pa in future.
    T-Day may not be good news for fund members who earn more than R1 270 000 per year and contribute 27.5% of remuneration. They will be entitled to the same tax deductibility but will be effected by the new rand cap of R350 000 per year. This is a cumulative maximum for all retirement fund contributions. Therefore, higher income earners will have to aggregate their contributions, including those to retirement annuity funds, and decide on a strategy going forward. There are alternatives, but none as effective as making deductible contributions.
  • B: T-Day introduces changes to the benefit structure of provident funds.

  • Annuitisation requirements
    Contributions paid to a provident fund after 1 March 2016 will effectively be paid into a pension fund type benefit structure. That means that on retirement you can only take one third as a lump sum and the remaining two thirds must be used to purchase an annuity (the exception regarding 55 years and older will apply) with the contributions post 1 March 2016.

    However, the government has increased the de minimis amount from R75 000 to R247 500 for pension, provident, and retirement annuity funds. This means that if the benefit consisting of contributions paid after 1 March 2016 is less than R247 500 you can take the entire amount in cash in respect of each fund that you retire from.

    Depending on your level of income it could take another 5 to 10 years or so before you will be compelled to buy an annuity. If you are 55 and older on T-Day (1 March 2016) these annuitisation requirements will also not apply to you while you remain in that fund. Should you transfer to another fund the benefits accumulated up to at that point will be protected. All contributions made to the new fund and growth thereon will not be exempt and will be subject to the annuitisation requirements.
  • Existing lump sum benefits protected
    All the benefits in a provident fund that a member has at the end of February 2016 will be protected. The amount and the investment return thereon can still be taken in a cash lump sum at any time in the future. If you transfer to another fund, these benefits will retain their status (the special provisions i.r.o persons 55 and older will however only apply if they remain members of that provident fund).

    The detail: Be aware of the fact that the new Act contains an oversight and that it can be argued that transfers to pension funds are not protected. However, National Treasury indicated that the legislation will be corrected with effect 1 March 2016. When a provident fund member retires in a few years’ time they will firstly be able to take as a lump sum, the benefit in the fund as at 29 February 2016, plus the growth thereon. In addition to this, one third of the contributions and growth thereon accumulated after 1 March 2016 may be taken as a lump sum - or the entire amount of such accumulation, if it does not exceed R247 500. (See above for the special dispensation for provident fund members 55 years or older as at 1 March 2016.)

    If, for example, your total retirement benefit is R1 million and your fund value as at 29 February 2016 and growth thereon is R800 000, then the full benefit may be taken in cash because the contributions on/after 1 March 2016 and growth thereon (i.e. R200 000) are less than R247 500.

Yes, you can.

Whatever amount you could take as a lump sum if you resigned at the end of February 2016, will continue to be available to you in cash whenever you resign or retire in the future - together with the investment growth thereon.

No. In fact, if you make member contributions to the fund you may enjoy a tax deduction and a greater take home pay.

The fact that employer contributions will be taxed in your hands as a fringe benefit is cancelled out by the fact that you as member will receive an increased deduction of up to 27.5% of your total remuneration (or your taxable income if that is higher) in respect of your own contributions as well as any contribution made by your employer. Before T-Day you enjoyed no employee contribution deduction. However, you will pay more tax if your annual contribution exceeds R350 000.

To be able to benefit from the generous 27.5% tax deduction available to members you need to increase you contributions.

According to the Sanlam Employee Benefits Benchmark Survey the average contribution rate is in the order of 15% of pensionable annual remuneration (PEAR). The average member therefore has significant scope to increase tax deductible contributions.

There are three important considerations:

  • The tax deduction thresholds have increased.

    The detail: For provident fund members the total deductible contribution is 7.5% more (27.5% instead of the current 20% for employer and 0% for employees).
    The exception: A maximum deduction of R350 000 pa has been introduced. That means that persons who earn more than R1 270 000 and who contribute for example 27.5% of remuneration (not PEAR as discussed below) (R1 270 000 x 27.5% = R349 250) will be limited to the rand cap of R350 000 per year. For high income earners the rand cap could also be reached even on a lower percentage than 27.5%.
  • Many members now enjoy contribution flexibility for the first time.
    This essentially means that a member can make additional voluntary contributions that, together with any other own and employer contributions to any other fund of which you are a member, are deductible up to 27.5% - if the fund rules provide for it.

    The detail: The old concept of a maximum additional voluntary contribution (AVC) deduction of R1 800 per year has been scrapped. When we talk about AVCs after T-Day we refer to the member’s ability to request HR to deduct a greater contribution over and above the normal compulsory contributions.
  • Contributions are typically calculated on PEAR at the moment.
    The new 27.5% threshold is based on remuneration as defined in the Income Tax Act. These two concepts are very different.

    The detail: Remuneration includes all remuneration earned by an employee such as fringe benefits, additional bonuses or commissions. The closest proxy for remuneration is total guaranteed package (TGP). Because PEAR is typically only 80% (or less) of TGP, there will be even more capacity to increase tax deductible contributions.

    Example: A 27.5% contribution based on PEAR is only a 22% contribution based on TGP if PEAR is 80% of TGP.
    If your TGP is: R 100 000
    And your PEAR is: R 80 000
    27.5% of PEAR is: R 22 000
    R22 000 is 22% of TGP

I want to pay 7.5% and my employer is paying 30%. Would the difference of 10% be seen as a fringe benefit and taxed in my hands?

Any contribution paid by an employer is taxed as a fringe benefit and deemed to have been made by the member. Under a defined contribution fund the fringe benefit is equal to the amount of the contribution. Therefore, the total contributions made will be 37.5% (30% + 7.5%). Only 27.5% will be allowed as a deduction in one tax year for the benefit of the member.

The detail: Your employer will get a tax deduction for the full contribution in terms of section 11(l) of the IT Act. The employer contribution is deemed to have been made by you and will be shown as a fringe benefit on your pay slip/IRP5. However, the amount will be deductible by you as long as it does not exceed the new thresholds. If it is not deductible you will be out of pocket since you will be paying tax on the contributions made above the new thresholds. However, upon your resignation or retirement you will enjoy tax relief in respect of contributions that were not deductible.

It is important to be clear on the amount that the contribution is calculated on. The 27.5% should be calculated on your remuneration or taxable income, whichever is the greater. The current 37.5% contribution you refer to is in all likelihood based on your PEAR.

The detail: PEAR is typically 80% of your total guaranteed remuneration (TGP) (but it can be less). If that is the case the correct calculation will be that a contribution of 30% of TGP was made -TGP being the closest proxy for remuneration.

Example 1:
If your TGP is: R120 000
And your PEAR is: R96 000
PEAR as a % of TGP is: 80%
37.5% of PEAR is equal to 30% of TGP (37.5% x 80%)

In this example you would be contributing 2.5% more than the maximum tax free contribution percentage and would therefore not receive a tax deduction for the additional 2.5% which is taxed in your hands as fringe benefit.

Example 2:
If your TGP is: R120 000
And your PEAR is: R80 000
PEAR as a % of TGP is: 66.7%
37.5% of PEAR is equal to 25% of TGP (37.5% x 66.7%)

In this example your total contribution amount is below the maximum tax free contribution percentage and therefore you will be allowed to receive the full tax deduction. Any amount not deducted can be rolled over to a next year. So in example 1, the 2.5% additional contribution can be rolled over to a next year. The nominal value of amounts not rolled over will be available to be offset against any lump sum at withdrawal or lump sum or annuity benefit at retirement.

The new deduction thresholds
No action is necessary unless you make contributions of more R350 000 per year and prefer to make these investments outside the fund. In such a case the onus is on you to make sure that your total contributions do not exceed the 27.5% or the R350 000 per year threshold by reducing contributions.

The changes to the provident fund benefit structure
Your right to take current benefits in cash when you retire are protected in law. The fund will keep track of these amounts for you. Nothing you do now is likely to give you more protection than you already have in terms of the legislation. The money is already in the most tax- and cost-effective investment vehicle available to you in SA. As for future contributions – there will only be one type of benefit structure for retirement funds.

Whether you pay contributions to a provident fund, a pension fund or a retirement annuity fund, the position will be exactly the same. You will be required to purchase an annuity with two thirds of the benefit, unless the amount does not exceed the de minimis of R247 500 in which event you can take the entire amount in cash. (See above for the special dispensation for provident fund members 55 years or older as at 1 March 2016.)

The short answer is no.

Firstly, retirement funds are virtual tax havens. No income tax or capital gains tax apply in respect of the fund’s investments and death benefits are normally not subject to estate duty. You won’t find a more tax-efficient saving vehicle in South Africa.

Secondly, retirement funds are wholesale operations that enjoy lower institutional prices and economies of scale. National Treasury is proposing a whole range of measures to reduce the costs even further.

Thirdly, retirement funds, as a form of contractual saving, are super convenient and efficient. Membership and contributions to occupational funds are arranged, investments are made and benefits will be paid whether the member pays any attention to these or not. Benefits are also protected against creditors.

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