Retirement Provisions
Two‐pot retirement system
The discussion paper entitled Encouraging South African Households to Save More for Retirement was published in December 2021. It outlines a set of reforms to enable pre‐retirement access to a portion of one’s retirement assets – while ensuring that the remainder is preserved for retirement. Public comments on the tax treatment of contributions to the two pots are being reviewed in preparation for public workshops, to be followed by legislative amendments.
Reviewing the transfer of total interest in a retirement annuity fund
The Income Tax Act allows members of retirement funds to transfer their retirement interest from one retirement fund to another. This provision is subject to certain conditions, for example, if the individual is transferring to a similar type of retirement fund or from a less restrictive to a more restrictive retirement fund and – in the case of retirement annuity funds – if the total interest in the transfer or fund is transferred. These conditions result in retirement annuity fund members with more than one contract in a particular fund being restricted from transferring one or more contracts from one retirement annuity fund to another. However, members of a preservation fund are not restricted on the proportion of their retirement interest that can be transferred into another fund. To address this anomaly, government proposes changing the legislation to allow fund members to transfer proceeds of one or more contracts in a particular retirement annuity fund, subject to certain conditions to ensure that the current minimum thresholds are not contravened.
Retirement of a provident fund member on grounds other than ill health
In 2021, the retirement reforms that require mandatory annuities for provident funds came into effect. As a result, it is no longer necessary to differentiate between a pension and provident fund for retirement purposes, as these funds now operate in the same way. Paragraph 4(3) of the Second Schedule to the Income Tax Act treats pension and provident funds differently. According to this paragraph, if a member of a provident fund who is younger than 55 retires from that fund for reasons other than ill health, any lump sum received shall be taxed as a withdrawal benefit rather than a retirement benefit. This does not apply to members of pension or retirement annuity funds. To address this anomaly, government proposes to delete paragraph 4(3) of the Second Schedule to the Act.
Apportioning the interest exemption and capital gains tax annual exclusion when an individual ceases to be a tax resident
In 2012, section 9H(2)(b) of the Income Tax Act was clarified to provide that, when an individual ceases to be a South African tax resident, their year of assessment is deemed to have ended on the date immediately before the day their tax residency ceased. The section further provides that the individual’s next succeeding year of assessment will start on the day on which tax residency is ceased.
Consequently, the individual has two years of assessment during the 12‐month period, which means the individual may be able to double‐up on certain exemptions or exclusions that are allowed per year of assessment. This goes against the policy rationale of the provisions of the Act. To address this anomaly, government proposes that the legislation be changed to apportion the interest exemption and capital gains annual exclusion in such instances.
Clarifying the applicability of tax‐neutral transfers from a pension to a provident fund
Before the mandatory annuitisation of provident funds came into effect in 2021, transfers to a provident or provident preservation fund would be taxable if the transfer was made from a fund that had mandatory annuitisation requirements. From 1 March 2021, and in accordance with paragraph 6(1)(a) of the Second Schedule to the Income Tax Act, transfers to a provident or provident preservation fund would be tax‐neutral irrespective of the type of retirement fund from which the retirement interests were transferred. Both before and after 1 March 2021, the policy intent is for these transfers to be tax neutral.
Government appears to be of the view that the current provisions of paragraph 6(1)(a) create an anomaly: transfers from a pension fund to a provident fund related to contributions made before 1 March 2021 are not tax neutral. Government proposes that contributions to a pension fund before 1 March 2021 also receive tax‐neutral transfer status.
Clarifying the compulsory annuitisation and protection of vested rights when transferring to a public sector fund
In 2013, retirement fund reform amendments were made to the Income Tax Act regarding the annuitisation requirements for provident funds and provident preservation funds. These amendments were intended to preserve retirement fund interests during retirement and to ensure uniform tax treatment across the various retirement funds. This would result in provident funds being treated similarly to pension and retirement annuity funds, and provident preservation funds being treated similarly to pension preservation funds, regarding the requirement to annuitise retirement benefits.
These amendments came into effect on 1 March 2021, subject to the protection of vested rights. As a result, historical vested rights (those that arose before 1 March 2021) were segregated from new rights (those arising after 1 March 2021). The protection of vested rights, therefore, applies as follows:
- Any member of a provident or provident preservation fund as at 1 March 2021, will not be required to annuitise any historic vested rights
- New vested rights in relation to members who are 55 years or older as at 1 March 2021, will remain protected provided the member remains in that same fund
- Historical vested rights may be transferred into another retirement fund without forfeiting the protection of their vested rights (irrespective of the number of transfers effected)
Government seems to be of the view that the current provisions would forfeit the protection of historical vested rights if a transfer is made into a public‐sector fund. This is because the pension fund and provident fund definitions do not make any reference to the protection of vested rights for individuals who were members of a provident or provident preservation fund as at 1 March 2021.
To address this anomaly, government proposes amending the pension and provident fund definitions to ensure that historical vested rights remain protected even if they are transferred to a public‐sector fund.
Clarifying paragraph (eA) of gross income regarding public‐sector funds
In 2021, the retirement reforms that require mandatory annuities for provident funds came into effect. These reforms included amendments that cater for public‐sector pension funds that operate like provident funds. As such, with effect from 1 March 2021, members of provident funds (including public sector pension funds that operate like provident funds) are required to receive their benefits as annuities on retirement. At issue is the fact that, despite the above‐mentioned changes regarding the annuitisation of public‐sector funds, paragraph (eA) of the definition of gross income in section 1 does not mention public‐sector funds that fall within paragraph (a) of the definition of provident fund. Government proposes that paragraph (eA) be clarified to ensure that gross income includes all public‐sector funds.
These amendments will take effect from 1 March 2022.