Proposals affecting the retirement fund industry
Adjustment of retirement tax tables
As part of the periodic reviews of monetary values in tax tables, the brackets for retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits will be adjusted upwards by 10% to compensate for inflation. This means that the tax-free amount that can be withdrawn at retirement increases from R500,000 to R550,000.
The rates shown in tables 4.8 and 4.9 below are effective from 1 March 2023:
Comment: This adjustment is welcomed, as the last adjustment was made during the 2014 Budget Speech. It is important to note that any previous withdrawals will be taken into account for purposes of calculating the tax-free portion of the lump sum withdrawal or retirement benefit (i.e., it is cumulative).
Two-pot retirement system
Following extensive public consultation, the first phase of legislative amendments to the retirement system is due to take effect on 1 March 2024. The intent of these amendments is to enable pre-retirement access to a portion of a member’s retirement assets, while preserving the remainder for retirement.
Retirement fund contributions will remain deductible up to R350,000 per year or 27.5% of taxable income per year – whichever is lower. Permissible withdrawals from funds accrued before 1 March 2024 will be taxed according to the lump sum tables. Withdrawals from the savings pot before retirement will be taxed at marginal rates. On retirement, any remaining amounts in the savings pot will be taxed according to the retirement lump sum table.
Four areas require additional work: a proposal for seed capital, legislative mechanisms to include defined benefit funds in an equitable manner, legacy retirement annuity funds and withdrawals from the retirement portion if one is retrenched and has no alternative source of income. The first three matters will be clarified in forthcoming draft legislation. The final matter will be reviewed as a second phase of implementation.
Comment: The targeted implementation date of 1 March 2024 will be extremely challenging unless the design of the two-pot system is finalised in the very near future.
Third-party data and personal income tax administration reform
The pay-as-you-earn (PAYE) and personal income tax administration reform announced in the 2020 Budget has given pensioners the option to agree to more accurate PAYE withholding rates to take account of multiple sources of income, as well as enabling 2.9 million individual taxpayers to be automatically assessed without the need to file personal income tax returns. The reform will continue over the medium term with a view to reducing the administrative burden for employers, payroll administrators and SARS, as well as individual salaried taxpayers. Work has commenced, in consultation with employers and representative organisations, to provide employer and employee data on a monthly basis in a fully automated fashion. Over time, the need for employer PAYE annual reconciliation is expected to fall away, and the reform will be extended to third-party data providers.
Clarifying the amount of employer contribution to a retirement fund to be deductible
Section 11F(4) of the Income Tax Act deems an employer contribution to a retirement fund as a contribution made by the employee, and it is calculated as the amount equal to the cash equivalent of the value of the taxable benefit. However, there is no requirement that the calculated cash equivalent be included in the employee’s income, as is the case in sections 6A and 6B of the Act. This is against the policy rationale of the Act’s provisions. To address this, it is proposed that the Act be amended to require that the cash equivalent of the taxable benefit for employer retirement fund contributions be included in an employee’s income before a tax deduction is allowed.
Transfers between retirement funds by members who are 55 years or older
In 2022, changes were made to the Income Tax Act to allow for tax-neutral transfers between retirement funds by members who are 55 years or older in instances where transfers of retirement interests in relation to a member who has reached normal retirement age but has not yet opted to retire. It has come to the Government’s attention that there are some instances of active contributing pension and provident fund members who have reached retirement age and been subjected to involuntary transfers to another pension or provident fund that may still be subject to tax. To address this, it is proposed that members of pension or provident funds who have reached the normal retirement age, as stipulated in the rules of that fund, but have not yet opted to retire must, as part of the involuntary transfer, be able to have their retirement interest transferred from a less restrictive to a more restrictive retirement fund without incurring a tax liability. The value of the retirement interest, including any growth thereon, will remain ring-fenced and preserved in the receiving pension or provident fund until the member elects to retire from that fund. This means that these members will not be entitled to the payment of a withdrawal benefit in respect of the amount transferred.
Comment: This is an issue that has been raised by the retirement fund industry for a number of years. Addressing the anomaly in this regard would be welcomed.
Auto enrolment
In 2023, National Treasury will finalise policy proposals on how to expand the participation and coverage of all formal and informal workers in a retirement fund without excessively burdening their disposable income. These proposals build on National Treasury’s December 2021 paper entitled
Encouraging South African Households to Save More for Retirement. Consideration will be given to a voluntary and flexible savings scheme for informal workers.
Governance
Legislative amendments to improve governance of retirement funds – particularly commercial umbrella funds – will be published in 2023, and tabled in Parliament thereafter.
Unclaimed assets
In September 2022, building on joint work with National Treasury, the Financial Sector Conduct Authority (FSCA) published a discussion paper on the nearly R90 billion of unclaimed assets across the financial sector. One recommendation it put forward is to establish a fund into which all unclaimed assets must be transferred and managed. Alternatively, unclaimed assets can be transferred into the National Revenue Fund for the same purpose. Further consultation on the FSCA recommendations will take place in 2023. A final paper will be published in 2024.
Apportioning the tax-free investment contribution limitation and limiting the retirement funds contributions deduction when an individual ceases to be a tax resident
In 2022, the Income Tax Act was amended to provide that, when an individual ceases to be a South African tax resident, the annual interest exemption applicable to individuals in terms of section 10(1)(i) is apportioned, and the capital gains tax annual exclusion applicable to individuals in terms of paragraph 5(1) of the Eighth Schedule to the Act is limited. To ensure there is alignment with the Act’s other provisions for individuals ceasing to be tax residents, it is proposed that further changes be made to section 12T(4)(a) to apportion the tax-free investment contribution limitation and section 11F(2)(a) to apportion the annual limit on the deduction of the retirement fund contributions.