Cindy Wilson, Director of Employee Benefits at BDO
With the new retirement reforms set to come into effect on 1 March 2016, employers need to reconsider their current retirement funding arrangements for employees.
Under the current regime, employer contributions to pension funds are not taxable fringe benefits. Typically, pension fund contributions are set up with employer and employee contributions. The employees are able to claim up to 7.5% tax relief on their contributions.
From 1 March 2016, however, employer contributions to retirement funds will be taxed as fringe benefits in the hands of employees. Employers may need to consider how they currently remunerate their employees and establish whether there is an opportunity to change their rules to ensure employees are not negatively impacted.
The new reforms stipulate that employees can deduct up to 27.5% of total remuneration in respect of contributions (employer and employee) to pension, provident and retirement annuity funds, subject to an annual cap of R350 000. Employers will be able to claim unlimited deductions on their contributions.
From 1 March 2016, provident funds will also align with pension and retirement annuity funds and will be subject to the same taxation regime.
At retirement, one third of the fund value can be taken as a lump sum, while two thirds must be used to buy retirement income, regardless of whether it is a provident or pension fund.
This will, however, only apply to contributions paid after March 2016 on provident funds and will not apply to the value a member has in the provident fund at 1 March 2015, plus future growth of this value. This value may still be paid as a lump sum, on withdrawal or retirement, going forward and will not be subject to the one third limit that applies to contributions after 1 March 2016. Members of provident funds above the age of 55 at 1 March 2016 will also still enjoy full access to their full benefit on withdrawal or retirement.
In addition, the commutation threshold at retirement will be increased from R75 000 to R247 500 for all retirement funds. This means that if the retirement benefit of a member is R247 500 or less, the member will be allowed to take their whole benefit as a cash lump sum. That is, he or she will not be required to buy a pension.
The new reforms also stipulate tax free portability of retirement funds. Fund benefits can be transferred between all retirement and preservation funds tax-free.
Members will still be allowed to take their withdrawal benefits in cash and will not be required to keep their withdrawal benefits in a retirement fund when they change employers. In addition, compulsory preservation of retirement benefits has not been implemented.