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PENSION LAW - FAQ's             Back to home page

 

Pension Law – There is much confusion among pension and provident fund members about the recent changes to the tax laws pertaining to retirement contributions and benefits that came into effect on 1 March 2016.

Here are some quick facts:

  • Contribution to a retirement fund that are tax deductible: 27.5% of your total remuneration or taxable income.
  • Maximum deductible contribution amount: R350 000 per year.
  • Cash lump sum at retirement: For savings less than R247 500, the whole amount. If more than that, one third/ The other two thirds must be used to buy a pension. For provident fund members the requirement has been postponed until 2018.
  • Cash lump sum at retrenchment or on dismissal or resignation: The entire amount, subject to taxation.
  1. What deduction changes became effective on 1 March 2016?
  2. What can I now take as a lump sum on retirement?
  3. Annuitisation for provident and provident preservation fund members has been postponed to March 2018, but what does this mean?
  4. How will the changes that took place on March 1 affect me?
  5. What is the difference between how my retirement benefits are treated before and after March 1?
  6. Can I as a pension or provident fund member get my savings in cash if I resign or if I am retrenched or dismissed prior to retirement?
  7. What can you take as cash on retirement if, apart from the saving in your employer-linked pension or provident fund, you have savings in other retirement funds, such as RAs?
  8. Is the government nationalising my fund?
  9. Is the government forcing me to preserve my savings when I change jobs?

 

1. What deduction changes became effective on 1 March 2016?

 

Pension, provident and retirement annuity (RA) funds previously had different deduction allowances. As of March 1, members of all approved contributory funds (pension, provident and RA funds) qualify for a contribution deduction of 27,5 percent of the greater of their taxable income or the total remuneration that receive from employment.

A member can contribute the total amount into a single fund or a combination of funds (for example, some of the money into a provident fund and the rest into an RA fund).

The deduction is capped at R350 000 per year, which means that only someone with an annual taxable income or remuneration of more than R1 272 727 will reach this maximum, if they take advantage of the full 27.5 percent deduction afforded to them. Contributions not allowed as a deduction for this year can be rolled over and claimed the following year.

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2. What can I now take as a lump sum on retirement?

 

For pension, pension preservation and RA fund members, the general rule is that you may take one-third of your retirement benefit in cash and you must use the remaining two-thirds to purchase an annuity (a product that buys you a monthly pension). The exception to the rule is that if your total benefit is less than a certain amount, known as “de minimis for annuitisation”, you may take the full retirement benefit in cash. This de minimis amount was increased from R75 000 to R247 000 with effect from March 1 this year.

This means that if the amount in your pension fund at retirement is R247 500 you can take the entire benefit in cash. However, if your saved amount is, for example, R 270 000 you must use two-thirds (R180 000) to buy an annuity and may only take the balance (R 90 000) in cash. This annuitisation rule is not new for pension, pension preservation and retirement annuity fund members, because they were already required to purchase an annuity at retirement age, provided their savings were above the de minimis amount .

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3. Annuitisation for provident and provident preservation fund members has been postponed to March 2018, but what does this mean?

 

Annuitisation refers to buying a pension (known as an annuity) at retirement with two-thirds of retirement savings, provided the savings are above the de minimis amount.

An annuity is intended to secure a regular income for you in retirement for the rest of your life. There are various options available, and you can choose t he type of annuity and the provider when you retire (depending n the rules of your fund).

Members of pension, pension preservation and RA funds are already required to use two-thirds of their retirement savings at retirement to buy an annuity. The original annuitisation component of the tax reforms would have required certain provident and provident preservation fund members, depending n their retirement savings amount and other factors, also to purchase an annuity at retirement. This, however, has been postponed to March 2018.

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4. How will the changes that took place on March 1 affect me?

 

The tax amendments will impact people differently, depending on their personal situations and circumstances and the amounts contributed by their employers. This could affect you in the following ways:

  • Before March 1, the amount that the employers of members of pension and provident fund contributed to these funds had no tax impact on these members. With effect from March 1, all employer contributions to these funds attract fringe benefits tax in the hands of these members. But you should not be unduly concerned, because this will have no impact on most members. This is because the employer contribution is deemed to have been made by you for the purposes of claiming their tax deduction for retirement fund contributions, and for the vast majority of members, the fringe benefits inclusion will be more than offset by the increased deduction available to them.
  • Members contributing more than R 350 000 per year will pay more tax.
  • Provident fund members contributing less than R 350 000 will, for the first time, enjoy tax deductibility on their contributions, which means that their take home pay could rise.
  • The level above which pension fund, pension preservation fund and RA members are required to use at least two-thirds of their savings to purchase an annuity (the de minimis amount) has increased from R 75 000 to R 247 500.

 

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5. What is the difference between how my retirement benefits are treated before and after March 1?

If you are a:

  • Pension fund member:
    • Tax deductibility of your contributions is up from 7.5 percent of pensionable earnings to 27.5 percent of the greater of your taxable income or your total remuneration received from employment.  This is subject to a yearly maximum of R 350 000.
    • You are already required to use two-thirds of your savings at retirement to buy a pension in the form of annuity payments, and this does not change.
    • The only thing that has changed is the annuitisation threshold below which annuitisation is not required. The de minimis for annuitisation has increased from R 75 000 to R 247 000. Therefore, if you have less than R 247 500 in total retirement savings when you retire, you can take the whole amount in cash.
  • Provident fund member:

Before March 1, member contributions were not tax deductible (however, employers could deduct employer contributions from their tax).  Since March 1, provident fund member contributions are tax deductible, and you can contribute up 27,5 percent of your taxable income or total remuneration from employment (whichever is greater), subject to an annual maximum of R 350 000.

  • RA fund member:

Previously there was a tax deductibility of 15 percent for non-pensionable earnings from employment into your RA fund.  This is subject to an annual maximum of R 350 000.

 

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6. Can I as a pension or provident fund member get my savings in cash if I resign or if I am retrenched or dismissed prior to retirement?

 

Yes, you can still take your benefit in cash. There is no change.

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7. What can you take as cash on retirement if, apart from the saving in your employer-linked pension or provident fund, you have savings in other retirement funds, such as RAs?

 

The R 247 500 de minimis amount applies to each fund separately if the funds are with different providers.

Read more about Business Rescue here.

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8. Is the government nationalising my fund?

 

No. The fund trustees will still make decisions in the retirement fund. Employers will still be able to control the benefit structures of their employees. You will still either receive a pension from your fund or be able to choose the type of annuity and the provider when you retire (depending on the rules of the fund).

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9. Is the government forcing me to preserve my savings when I change jobs?

 

No. The new rules do not deal with preservation at all. There is no change. There is no reason to resign to retain your current rights.

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