19 Nov 2012
From the Desk of the Principal Officer of the Destiny Umbrella Retirement Funds
For a number of years National Treasury has planned to make sweeping changes to the Retirement Savings Industry. Finally, in May 2012, a paper entitled Strengthening Retirement Savings was published. This has been followed byEnabling better income in retirement (paper B) and Preservation, portability and governance for retirement funds (paper C) which were both circulated in September.
Two more papers were released in October 2012; Incentivising non-retirement savings (paper D), and Improving tax incentives for retirement savings (paper E). The last, entitled Retirement fund costs (paper A) was to be released by the end of 2012.
The purpose of these papers is to set out Treasury’s concerns and various proposed solutions in order to invite discussion and to eventually reach consensus around a set of final proposals.
There are clearly issues with existing retirement savings regulations and we are comforted by the fact that Government has elected a road of consultation with Trade Unions and Business so that a solution by consensus can be achieved.
We can also be comforted by the statement that accrued or vested rights will be protected.
In our opinion, the main issues that Government, the Industry and the Membership face are Leakage, Compulsory Membership, Annuities and the Tax Treatment of Contributions:
Too much savings moves from Provident Funds out of the Retirement Industry at Retirement. More concerning is the fact that an extremely low percentage of members elect to transfer their savings when leaving employment.
In the last 12-months alone, and despite our best efforts, only 9% of Destiny’s withdrawing members transferred their savings. In terms of value transferred, the number is more heartening which leads us to believe that better educated and more financially able members elect to transfer. The value transferred is 27%.
Provident Funds: the paper suggests 3 possible scenarios all of which indicate that Provident Funds will be significantly changed or, more likely, discontinued.
Preservation: it is proposed that full protection is granted to accrued balances but that preservation be made compulsory for growth on existing values as well as new contributions. Again, there are a number of proposed solutions, including full preservation, partial preservation and higher tax to act as a disincentive.
This approach is in line with the current approach in many countries, where there is an obligation on all employees to join a retirement fund.
Government believes that Living Annuities are being over-utilised and that Conventional Annuities, guaranteed by insurance companies, should be more widely used. They believe that there is place for living annuities but that the costs and risks are high for members. In 2003, 50% of single premiums were used to buy conventional annuities and in 2011 the number was only 14%.
Treasury is proposing a few solutions which includes the introduction of a retirement vehicle called a Retirement Income Trust (RIT). A RIT won’t offer full investment choice, members will be subject to age-dependent drawdowns and will strictly limit commissions.
Tax Treatment of Contributions
Contributions to Retirement Annuities, Pension Funds and Provident Funds are treated differently from a tax perspective which has caused much confusion and resulted in an inequitable system.
From March 2014 individuals will be allowed to deduct up to 22.50% of the higher of taxable income or employment income for contributions to pension, provident and retirement annuity funds with a minimum annual deduction of R20 000 and an annual maximum of R250 000. For individuals at least 45 years of age the deductible amounts will be up to 27.50% with a minimum annual deduction of R20 000 and an annual maximum of R300 000.
GIB will be sending their comments on the draft proposals to National Treasury.
We will continue to keep our members posted as and when information becomes available.
Information provided by GIB Employee Benefits on behalf of the Destiny Umbrella Retirement Funds.