Tax-Related Retirement Reforms Taxation Laws Amendment Acts (TLAA) of 2013 and

OBJECTIVES AND FEATURES OF THE REFORMS

Key tax and retirement reform policy objectives The primary aim of these proposals is to encourage household savings and ensure that individuals are not vulnerable to poverty, especially in retirement Key policy response proposals to key challenges −Encourage preservation, especially during job changes −Enhance governance of funds −Encourage annuitising at retirement −Simplify the taxation of retirement contributions −Encourage non-retirement saving through tax free saving plans −Encourage good value retirement products and services by reviewing costs These are urgent proposals to address major challenges in the current retirement system, especially member protection Policy responses are consistent with envisaged social security reform 3

Rationale for the tax changes in TLAA 2013 AND 2015 There are currently three different tax treatments for allowable deductions for pension funds, provident funds and retirement annuity funds –Complicated: creates confusion on how to save for retirement most effectively from a tax perspective –Misleading: current system works largely on pensionable salary, than the total taxable income/remuneration –Inequitable: individuals may get a varying allowable deduction that is dependent on which type of retirement fund they belong to, and high income earning taxpayers receive the greatest benefit through a deduction and are able to excessively benefit through package structuring 4

What is currently legislated by TLAA 2013 and 2015 The 2013 TLAA seeks to harmonise the tax treatment of contributions across different retirement funds to ensure equity and to simplify the calculation of the allowable deduction –Employer contributions to retirement funds would be treated as a fringe benefit in the hands of the employee –Total contributions (including employer and employee contributions) to all retirement funds would be given the same level of allowable deduction of 27.5% of taxable income or remuneration –Limit the benefit to higher earners by placing a cap of R –De minimis increased to R (in TLAA 2015), so a member only has to annuitise when retirement savings exceed R Higher tax incentive will encourage higher retirement savings, for all taxpayers who are currently saving less than R a year 5

DISTINCTION AND HARMONISATION BETWEEN PENSION AND PROVIDENT FUNDS

Distinction between pension and provident funds TAX DISTINCTION –Pension fund employee contributions receive a tax deduction for their contributions AND employer contributions, BUT Provident fund employees (indirectly) receive only a tax deduction for the employer contribution (as a non-taxable fringe benefit) –This means that, generally, pension fund members are able to benefit more from tax deductions by lowering their taxable income and therefore increasing take home salaries, while provident fund members have an indirect and limited benefit as only employer contributions are tax deductible RETIREMENT BENEFITS DISTINCTION –Pension funds members are required to annuitise (i.e. convert into regular income) two-thirds of their retirement benefit, at retirement. One-third can be taken as a cash lump sum –Provident fund members are NOT required to annuitise, i.e. they can take entire retirement benefit, at retirement, as a cash lump sum 7

What is harmonised between pension and provident funds Tax side –Provident funds will now look the same as pension funds as both employer and employee contributions will be tax deductible up to a limit –The maximum amount of contributions that can be deducted for tax purposes will be the same for both provident and pension funds; 27.5% or R of taxable income/remuneration per annum –All employer contributions into a pension or provident fund will be treated as a fringe benefit in the hands of the employee This does not mean contributions will now be automatically; contributions up to 27.5% (or R ) will enjoy tax benefit Benefit side –Both pension and provident funds will now require annuitsation of two- thirds of benefits at retirement. One-third cash lump sum still available –R de minimis will apply to all types of retirement funds 8

IMPLICATIONS AND ADVANTAGES FOR WORKERS

TLAA 2013 and 2015 Implications for Provident Funds Employee contributions by provident fund members would now receive a tax deduction which was not previously available Provident fund members required to annuitise, but only from new contributions –Concept of tax deduction linked to requirement to annuitise –Annuitising important for managing old age poverty associated with lump-sum spending But annuitising requirement softened by protecting full vested rights –Anyone over the age of 55 (who stays in the same provident fund, unless if forced to transfer) will not be required to annuitise –Anyone below the age of 55: Can still take as a cash lump sum accumulated provident fund savings (and the investment growth) as at 1 March 2016 at retirement Only 2/3rds of new contributions from 1 March 2016 will be required to be annuitised, BUT ONLY when new contributions total exceeds R (de-minimus) –The above means that annuitising requirement will not affect any retiree at least in the next five years, and many low-income earners will only be affected in 15 years time Note new law does NOT force preservation, so members can avoid annuitisation and cash full amount if they resign before retirement (but will pay a tax if they do so) 10

The benefits of the tax and retirement reforms (TLAAs) Allow provident members, for the first time, a tax deduction for their own contributions, and thereby increasing their take home salaries SARS data shows that there are over 2.5 million provident fund members who contribute to a provident fund. Around 1.25 million are above the income tax threshold and are likely to receive an increase in net pay Encourage workers to save and save more for their retirement because of the higher tax deduction limits for contributions Protect retirees against old-age poverty by extending the requirement to purchase an annuity to provident fund members Simplify the tax treatment of contributions to retirement funds (current system is complex and confusing) Vested rights* are protected, resulting in the impact of annuitisation taking longer to be felt by provident fund members (even though the effective date is 1 March 2016, members will not have to annuitise immediately) *Vested rights means accumulated retirement savings up to 1 March Protection of vested rights means that these savings (and growth on them) will not be affected by the new law, especially the requirement to annuitise, if also members do not elect to transfer accumulated savings out of existing funds 11

END