Important changes to laws governing retirement funds were recently promulgated in the 2016 Taxation Laws Amendment Act. There has been some controversy over these changes – specifically regarding the annuitisation of provident fund benefits at retirement. The following is a brief overview to help you understand what the changes entail and how they affect you.
After 1 March 2016 all retirement funds will be treated the same regarding the amount you can take as a cash lump sum (up to one third of your fund) and the amount which must be used to purchase an annuity – “annuitisation” (minimum- two thirds). This affects Provident Funds the most as previously retiring members were able to take their full fund in cash. However, most important, this will not affect:
- Members’ existing fund accumulation prior to March 2016.
- Members who are already 55 and over. Provided those members remain in the same funds until actual retirement.
Other important changes include an increase of the “de minimus rule” at retirement
- Where a member’s fund value in a pension, pension preservation, or retirement annuity fund on retirement is R247 500 (currently R75 000) or below, the full benefit will be accessible as a cash lump sum.
Where the non-vested portion of a provident fund or provident preservation fund retirement benefit is R 247 500 or less (i.e. the portion that is required to be annuitised), this benefit can be taken as a lump sum. The lump sum will be taxed according to the retirement tax table.
- It should be noted that the minimum amount applies per registered fund. The minimum amount will not automatically apply to living annuities as the living annuity definition in the Income Tax Act does not set out the actual amount, but refers to an amount determined by the Minister of Finance as published in the Government Therefore, for the de minimus rule to apply to living annuities, the publication will first have to take place.
Employer contributions to pension and provident funds
Contributions made by an employer to an employee’s retirement fund will be tax deductible under section 11(l) for that employer. No limitation will apply.
Employee retirement fund contributions
All contributions made to a retirement fund by an employer on behalf of an employee will be included in the employee’s gross income in terms of paragraph 2(l) of the Seventh Schedule_as a fringe benefit and is therefore taxable.
In terms of the section 11(k), individual taxpayers will be entitled to deduct all contributions made to all retirement funds – including pension, provident and retirement annuity funds but also including those contributions made by an employer on their behalf and taxed as fringe benefits in their hands.
The taxpayer will be entitled to a maximum tax deduction equal to 27.5% of the greater of:
- Remuneration or
- Taxable income (which excludes annuities and retirement lump sums)
An overall annual monetary cap of R350 000 applies.
All contributions that were not deductible due to such contributions being in excess of the above limits, may be carried over to the following tax year and will be deductible as if the excess contributions were made in that following year (although still limited to the aforementioned limitations).
Provident fund annuitisation (including provident preservation fund)
The rules relating to access on resignation and retrenchment will remain unchanged – therefore full access is possible on resignation and retrenchment.
We will summarise other amendments in the next edition of the Maximus Newsletter.