Retirement reform

Improving the treatment of retirement fund members

Government’s retirement reform programme will continue in 2018. Progress on the annuitisation of provident funds and preservation has been slower than anticipated because of a delay in the release of the discussion paper on comprehensive social security reform. As a result, consultations in the National Economic Development and Labour Council (Nedlac) on annuitisation of provident funds and preservation are still in progress and expected to be completed by the end of the year. As soon as an initial agreement is concluded, a set of recommendations can be finalised.

Other issues to be referred to Nedlac include broadening coverage to low-income earners who fall outside the collective bargaining system or work for small employers and bringing all public retirement funds within the same regulatory framework as private funds.

Government has also directed the Financial Services Board (FSB) to proceed with the following reforms:

• Lowering costs and consolidating funds: A key driver of costs is the large number of very small and uneconomical retirement funds (there are currently 5 144 funds, of which 1 651 are active). The FSB will oversee a significant reduction in funds (preferably to less than 200).

  Comment: 200 Funds is an aggressive target. Based on data from the FSB’s website, this puts the targeted asset threshold at above R1.5 billion per fund.

• Modernising and improving the governance of all retirement funds to King IV standards: All retirement funds will soon have to submit audited financial statements annually and include a minimum number of independent trustees.

  Comment: The FSB issued Information Circular 2 of 2018 on the morning of the budget, in which one of the proposals is that the audit exemption in respect of small funds be removed. The requirement that funds must have a minimum number of independent trustees is not law at present, other than for umbrella funds.

• Ensuring benefits are claimed: The FSB estimates that, in 2016, over R40 billion in pension and provident fund benefits were not claimed. Working with government, the FSB will consult with Nedlac on more efficient measures to find beneficiaries, including centralising data and funds.

  Strengthening enforcement measures to deal with criminal and unethical practices: The FSB will publish directives in 2018 to improve disclosures by both retirement funds and administrators and to outlaw unethical practices.

Tax treatment of contributions to retirement funds situated outside South Africa

The Income Tax Act currently exempts all retirement benefits from a foreign source for employment rendered outside of South Africa from taxation. The interaction of this exemption with double taxation agreements and other provisions of the Income Tax Act will be reviewed to ensure that the principle of allowing deductible contributions only in cases where benefits are taxable is upheld.

Align tax treatment of preservation funds upon emigration

Upon formal emigration an individual is able to withdraw the full value of their retirement annuity, after paying the applicable taxes. Government will consider aligning the tax treatment of different types of retirement fund withdrawals in such circumstances.

Comment: We welcome this proposal, because the industry asked that the concession that currently applies to retirement annuity funds, also be extended to preservation funds.

Allowing transfers to pension and provident preservation funds after retirement

In 2017, amendments were made to allow the transfer of pension or provident fund amounts to a retirement annuity fund after the retirement of an employee. These amendments expanded the choice of a retiree who decided to postpone retirement. Pension preservation and provident preservation funds were excluded as the administration required to disallow once-off withdrawals from these funds was considered too onerous. Industry consultations indicated that the system changes will not be burdensome, thus it is proposed that transfers to pension preservation and provident preservation funds be catered for in the legislation.

Comment: This is a very welcome proposal that enjoys industry support. Preservation funds will have to put controls into place to ensure that the once-off (pre-retirement) withdrawal option is not available for these members.

Rectifying tax anomalies on the transfer of retirement funds

The transfer of fund amounts between, or within, retirement funds at the same employer has inadvertently led to a tax liability for members, due to the current wording of the legislation. In principle, there should be no additional tax consequence for members if the transfers refer to amounts that have already been contributed to the retirement fund. Legislative amendments will be retrospectively introduced to correct these unintended tax liabilities.

Increasing the prudential limit

To increase investment in diverse assets, the offshore limit for funds under management by institutional investors is increased by 5% for all categories, including the African allowance.

Comment: We welcome the proposal in principle and await the final details.

Personal income tax

The bottom three personal income tax brackets and the primary, secondary and tertiary rebates will be partially adjusted for inflation through a 3.1% increase. The top four brackets will remain unchanged.

The new tax rates, rebates and brackets are indicated below:

 

Increase in VAT

A one percentage point increase in VAT to 15% was announced.

Comment: Government has not adjusted VAT since 1993, and it is low compared to other countries. The current zero-rating of basic food items such as maize meal, brown bread, dried beans and rice will limit the impact on the poorest households.

Increasing estate duty

In line with Davis Tax Committee recommendations, and in keeping with the progressive structure of the tax system, the 2018 Budget proposes to increase estate duty from 20% to 25% for estates worth R30 million and more.

To limit the staggering of donations to avoid the higher estate duty rate, any donations above R30 million in one tax year will also be taxed at 25%.

Both measures will be effective from 1 March 2018.

Prepared by Sanlam Employee Benefits​
Contributors: Anton Swanepoel, Danie van Zyl, Carien Veenstra, Freddy Mwabi, Ryan Campbell-Harris, Barend le Grange, David Gluckman, Viresh Maharaj