LEGAL UPDATE ISSUE 01February 1, 2011
LEGAL UPDATE ISSUE 03June 1, 2011
Budget Speech 2011
In his recent budget speech, Mr Pravin Gordhan, Minister of Finance, announced several amendments and proposed further amendments which will impact the retirement funds industry. This update only focuses on these amendment and their possible effects.
Taxation of retirement benefits
The tax-free amount on retirement increases to R315 000, with the following table being effective from 1 March 2011:
This change can be seen as an “inflation adjustment” and might lead to increases in the amounts in the future. Proposed amendments
Proposed amendments effective 1 March 2012
- Employer contributions to pension, provident, and retirement annuity funds will no longer be tax deductable by the employer and are to be included in the income of employees as fringe benefits and taxed accordingly.
- Employees will be allowed a deduction of up to 22.5% of taxable income for contributions to all approved retirement funds (i.e. pension, provident and retirement annuity funds). There will be a minimum annual deduction of R12 000 up to a maximum of R200 000. This proposal will have a negative tax effect on the higher income earning individuals and goes against the government’s previous comments of promoting “saving for retirement”. Why 22.5%? This equates to “standard fund” contribution rates of 7.5% member and 15% employer contributions. It is also uncertain how the proposed capping of the total contribution rate will affect defined benefit funds that currently contribute more than 22.5%.
- The maximum one-third cash commutation limit applicable to pension funds and retirement annuity funds at retirement is to be extended to provident funds (i.e. members of provident funds will no longer be entitled to commute their full benefit at retirement). Importantly, it was mentioned that there is no intention to apply this to existing accumulations. It seems that Government is keen to do away with the differences between pension and provident funds and hence aim for a simplification of the retirement funds industry.
- To encourage competition, government proposes to broaden the list of service providers allowed to provide living annuities to include collective investment schemes and the National Treasury’s retail savings bond scheme. Currently living annuities can only be provided by Long Term insurers.
As the retirement fund industry digests the proposed changes we will provide you with more relevant information as it becomes available.
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