BUDGET 2013 AND RETIREMENT REFORM

19 May 2013

GIB Employee Benefits overview of the Minister of Finance 2013 proposals

On 27 February 2013, the Minister of Finance announced proposals in the Budget Speech with regards to reforming the Retirement Industry. The focus is on governance, preservation, annuitisation and harmonisation of retirement funds.

The proposals follow a series of technical discussion papers with draft proposals that were issued in 2012. Both formal and informal consultations were held during 2012 in respect of these papers with stakeholders, including unions, industry associations and members of the public. Government has developed revised reform proposals for further consultation.

Taxation of retirement funds (T-day)

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 annuities up to 27.5% of the greater of remuneration and taxable income. A ceiling of R 350,000 per annum will apply. Unused deductions may be rolled over to assist members who have volatile incomes.

Preservation (P-day)

It is proposed that the rules on preservation will change on a date to be determined by legislation. It is expected that P-day will occur on or after 2015.  

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 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.

Due to the concerns in our current economic environment and given the difficulties many workers currently have in finding and retaining full-time employment, unemployed workers should be permitted some access to their retirement funds in case of need. By imposing too great a requirement to preserve this could inadvertently harm workers who are unable to access their retirement savings in times of greatest need.

Thus present rules on preservation funds will be relaxed to allow one withdrawal per year, but the amount of each withdrawal will be limited.

Preservation fund members will be able to withdraw each year the greater of the state old-age grant (OAG) or 10% of their initial deposit, excluding any portion to which vested rights apply. Any unused withdrawals may be carried forward, but to reduce administrative costs, individuals will be limited to one withdrawal per calendar year or part thereof.

Payments from Funds 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. In other words, members of provident funds will be required to purchase an annuity with 2/3 of their proceeds.

However, after P-day the new annuitisation rules will only apply to new contributions made to provident funds. Existing balances in provident funds, and growth on these, will not be subject to annuitisation.

Furthermore, 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 minimum requirement for annuitisation will be raised from R75,000 to R150,000.

Importantly, 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, based on charges, defaults, investment choice and drawdown rates, are met. To increase competition, providers other than registered life offices will also be allowed to sell living annuities.

Important Dates to remember

Date

Balance

31st May 2013

Formal consultation period on this document closes

Remainder of 2013

Legislation implementing these changes introduced

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

P-day: preservation rules change for all retirement funds

 Information provided by GIB Employee Benefits on behalf of the Destiny Umbrella Retirement Funds.

 

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