After decades of rather complex tax rules around retirement savings, from 1 March 2016, a new simplified approach to encourage people to save for retirement is a breath of fresh air.
Most people do not save enough for old age, that is a fact. In response to this dilemma, the South African Government has been focusing on a retirement reform programme for a number of years. The Tax Free Savings Plan, launched in 2015, was the first initiative aimed at encouraging savings. Now, the next phase brings some significant changes to the tax benefits of saving for retirement.
The changes are effective on two levels:
- Saving for retirement
Prior to 1 March 2016, tax deductions were allowed for contributions into retirement funding savings – pension funds and retirement annuities. These each had their own limits and were viewed separately. Pension fund contributions were tax deductible up to 7.5% of their retirement funding remuneration, or R1750, whichever was greater. Contributions to retirement annuities were tax deductible according to a formula – whichever was greater. Employee contributions towards an employee’s provident fund was not tax deductible.
From 1 March 2016, all contributions towards an individual’s retirement funding savings will be added together and be tax deductible up to a limit of 27.5% of taxable income, or remuneration, whichever is greater. This would include rental, investment and other non-salary income. The maximum annual deduction is R350 000, affecting those that earn in excess of R1,2m per year. More significant is that an employer’s contribution to an employees pension or provident fund will be tax deductible up to the maximum limit of 27.5% of taxable income. These employer contributions will be added to the employee’s taxable income as a fringe benefit, but it will be offset by the new, higher deduction.
Self employed people previously could deduct 15% of their taxable income towards retirement savings – this will now increase to 27.5%.
2. At retirement
Not much has changed at retirement, except that if the value of a member’s retirement annuity at retirement is worth R247 500 or less, they may take the full amount in cash. Prior to 1 March 2016, this figure was R75 000. If the value of the retirement fund exceeds R247 500, then one third may be taken in cash and the rest must be used to purchase an annuity.
For a member retiring form a pension fund, up to one third of their savings can be taken as a lump sum, of which R500 000 is tax-free if there have been no other withdrawals. The balance of their savings must be used to purchase an annuity. There is no change to this rule. Defined benefit pension fund members (such as GEPF) has no impact as benefits are paid in line with years of service and final salary.
Provident fund members will still be allowed to take their full retirement proceeds in cash, until 1 March 2018. After that date, they will have to buy an annuity with two thirds of any savings made after 1 March 2018, unless their savings are R247 500 or less. Members over 55 or older at that point will still be able to take the full amount in cash at retirement.
Taxpayers with retirement annuities are also limited to taking a maximum of one third in cash, and the balance must be used to purchase an annuity.
Each taxpayer needs to identify how these new tax laws affect them, and be encouraged to make use of the higher allowable deductions.
