Herewith short summary of changes impacting on Retirement Funding:
Contributions to retirement funds:
Contributions by employers to pension, provident and retirement annuity funds are not currently taxed in the hands of employees. From March1, 2012, these contributions will be deemed to be a taxable fringe benefit in the hands of the employee
Individuals will be allowed to deduct up to 22.5% of their taxable income for contributions to pension, provident and retirement annuity funds, subject to a maximum deduction of R200000 and a minimum of R12000. This is a slight change from the existing legislation where a distinction is drawn between retirement funding income and non-retirement funding income.
The taxation of employer contributions in the hands of employees will have a significant impact on the investment savings of retirement fund members. The tax deduction regime of 7.5% of approved remuneration for pension contributions and up to 15% of non-retirement funding income will no longer be applicable from 1 March 2012, and it is anticipated that the application of a total of 22.5% of taxable income (as opposed to approved remuneration or non-retirement funding income) for all retirement contributions means that the percentage deduction will be applicable off a smaller base).
The minimum deduction is potentially beneficial for low paid workers as this allows them to benefit from the floor level tax deduction. The R200000 cap on deductions makes sense from the government’s perspective as beyond a certain savings level it is clear that an individual will not be dependent on the state in old age.
Effective removal of provident funds
Withdrawal at retirement from provident funds will be limited to one third of the accumulated share of fund. On balance this is probably a good move as it will reduce the possibility of individuals squandering their retirement benefits. It appears that legacy provident funds will be accommodated, so members should not attempt to cash in their provident funds as their rights will be protected.
Taxation of lump sum benefits on retirement
Government will increase the tax-free lump sum on retirement from R300000 to R315000.