In March 2016, the Taxation Laws Amendment Act (2015) was signed into law by President Jacob Zuma. This directly affected how retirement funds are taxed.
Provident fund members, who receive a lump sum upon retirement, now benefit from a larger tax deduction on contributions that are made to their fund. This has increased from 20% to 27.5% of taxable income. If employees currently contribute to their fund, they will see an increase in their take-home pay because of this higher tax deduction.
How the new law affects employees:
- You can now save more for your retirement. Before you could only save (or contribute) an amount based on your “pensionable salary” which is about 75% of your total salary. Now, with this new legislation, you are allowed to save up to 27.5% of your total gross income for retirement, tax-free.
- From March 2018 (pending approval), two-thirds of your provident fund savings need to be put into a retirement annuity that will pay you a monthly sum after you retire. The remaining third can be withdrawn as a lump sum in cash. This is only for funds that are paid from March 2018. Any contributions until that date can still be withdrawn entirely as a lump sum upon retirement. However, the government is trying to help you save more and not be tempted to spend your entire provident fund in one go and then be indebted and impoverished in your old age. Splitting your fund into an annuity and lump sum helps you achieve financial security.
- Due to the tax deduction now applicable to provident fund contributions, you are likely to see an increase in your take-home salary each month.
- Now, the more you save and contribute towards your retirement, the greater your benefit will be in terms of tax.
- If you receive income outside of your salary (for example, from rental income or investments), you are now able to claim a pension fund deduction against this “taxable income.” Beforehand, this additional income could only be used to claim deductions on retirement annuity (RA) contributions. So now you can top up your retirement fund savings without having to take out a separate RA.
- The minimum fund balance requiring annuitisation has increased from R75 000 to R247 500.
- You can now consolidate your preservation funds. If you have changed jobs and funds and now have a few in your name, you can now pool them into one cost-effective product with a single administration fee.
- You can also transfer funds. For example, if your new employer offers a pension annuity, but your previous employer provided a provident fund, you can move all your existing funds into the new employer’s one, tax-free. You don’t lose any money or savings.
- Higher-income earners, with an annual salary of more than R1.2 million, will be affected negatively tax-wise. This is because the maximum you can contribute in a year to retirement, on a tax-free basis, is R350 000. Any contributions above this amount will be taxed and this will affect your take-home income.
How the new law affects employers:
- Your employees now have a higher “pensionable salary” – which is their entire gross salary, not just 75% thereof. This means that their risk cover premium will increase and they will subsequently have a greater cover.
- Employment contracts will need to include this new information and all current staff members communicated to.
- The tax-free contribution cap of R350 000 per annum includes administration costs and risk premiums. You can pay these fees separately or move to “unapproved” risk benefits. These are not attached to the fund and are therefore not paid out of the contribution.
- If your contribution includes “unapproved” risk premiums, such as an income disability fund, you need to levy a fringe benefits tax on these premiums. This makes sure that employees don’t claim this part of your contribution as a tax deduction.
- Adjust each employee’s PAYE deduction to reflect any changes in contributions that you make. You can neutralise additional contributions by way of a fringe benefits tax charge that is payable by the employee.
- You may also convert your contribution as an employer into that of an employee. You add the value of this contribution onto the employee’s salary and then increase the amount the employee contributes to the fund.
As you can see, with some administration tweaks, both the employer and employee will benefit from these changes. In the long run, most take-home incomes will increase, as will available funds upon retirement.