Why the new retirement laws are good for you
- Posted by Roger Hendricks
- On 02/17/2016
- 0 Comments
Notwithstanding some very loud objections to recent legislation on pension and provident funds, which
will come into effect on 1 March, the new laws should result in more money in the pockets of over 1m
While pension fund members will hardly notice the effect, the amendments contained in the two acts – the
2015 Tax Administration Laws Amendment Act No. 23 of 2015 and Taxation Laws Amendment Act No.
25 of 2015 – will be largely positive for members of provident funds.
According to Treasury, there are over 2.5m provident fund members and 1.25m of them are likely to see an
increase in their take-home salaries.
The objections have, to some extent, been based on misinformation that workers will not be able to cash in
their hard-earned retirement savings if they resign or are retrenched.
But at their heart, the objections are based on principle rather than being practical.
Cosatu believes government has taken away the right of workers to withdraw all of their savings on
retirement, and the amendments relating to annuitisation essentially take away this right.
Primarily, the amendments deal with two issues – tax and annuitisation (receiving one’s pension on a
regular basis rather than in a lump sum following retirement).
They result in the tax harmonisation of retirement funds, where members of all pension, provident and
retirement annuity (RA) funds will be allowed a contribution deduction of 27.5% of taxable income or
remuneration, whichever is largest.
This refers to contributions of employers and employees combined up to a maximum of R350000 a year.
In other words, this applies to everyone earning up to R1.27m, or the vast majority of South Africans who
On retirement, members will be allowed to take a third of their funds in a lump sum, and the remaining
two thirds must be annuitised – placed in a fund that releases money on a regular basis.
This applies only once the amount at retirement exceeds R247 500 (previously R150 000).
The biggest change relates to provident funds, where previously members could cash out the full amount
of their fund as a lump sum.
This only applies to contributions and interest or growth after 1 March, so current provident fund members
will still be entitled to take their contributions and interest/growth accumulated up to 1 March as a cash
Government’s aim, it says, is to simplify the tax treatment of contributions to retirement funds, limit
deductions of high-income taxpayers and improve savings by requiring provident fund members to buy an
annuity rather than take all their money in a lump sum.
The R350000 cap is aimed at restricting high earners. Treasury says government “is concerned about tax
avoidance structuring where high-income taxpayers are able to structure their remuneration packages to
reduce their tax liability out of proportion to what government considers to be fair”.
“The abuse/avoidance is mainly by high-income earners in provident funds, who exploit the fact that the
employer contribution is a non-taxable fringe benefit, and hence have funds where employers make a 20%
to 30% contribution with no contribution from the member.”
The amendments level the playing field.
Any savings prior to 1 March are not included in the new legislation. Neither are any fund members over
55 years of age as long as they stay in the same fund.
The changes, which have been mooted for some time, have been the subject of a fair amount of
misunderstanding and controversy, especially among unions, to the extent that people have been
encouraged to resign from their jobs before 1 March.
However, retirement industry experts have generally welcomed the changes and believe they will, on
balance, be positive for fund members.
One of the biggest benefits, they say, is that they encourage savings and ensure there is no risk of cashing
out pensions and investing the entire amount into loss-making schemes.
This is the issue that has raised the most suspicion, as government is taking away an individual’s right to
decide what to do with their own money.