Tax Alert: Retirement Funds

Transcription

1 Tax Alert: Retirement Funds Please take note of the following issues that may have a profound effect on your client s decisions relating to retirement fund actions. Issues that have in the past and could in the future lead to advice risk have been highlighted. Loss of tax-free pre-1998 portion during second transfer R tax-free at retirement Tax amendments effective from 1 March 2015: o R minimum lump sum commutation o Changes to deductibility of contributions Delayed tax penalty after pre-retirement withdrawal Cost implications of withdrawals from preservation funds Changes to provident funds Changes to preservation funds Loss of tax-free pre-1998 portion during second transfer The pre-1998 tax-free benefit will be forfeited in cases of a subsequent transfer to a second preservation fund or retirement annuity. The tax-free benefit is protected only during the original transfer from the Government Employees Pension Fund (GEPF) [from a par (a) fund to a par (c) fund]. Benefits transferred from a par (c) to another par (c) fund will lose their identity and tax-free status. This means you should not transfer existing preservation fund money to a new preservation fund or retirement annuity (a Section 14 transfer from a Stratus to a Glacier preservation fund, for example) if the original transfer was from a GEPF, and it included pre-1998 money. Tax losses for the member could be enormous and lead to serious advice risk complaints against you. Sanlam Distribution Academy It starts with us 1

2 R tax-free at retirement According to the new lump sum tax rates announced this year, the first R aggregated lump sum amount will be tax-free at retirement. At withdrawal, the first R will be tax-free. Tax amendments effective from 1 March 2015 o R minimum lump sum commutation At retirement, fund members will be allowed to take a full commutation when two-thirds of the member s retirement interest does not exceed R in other words, if the total retirement interest in the fund is R or less. All amounts previously received from the same fund will be taken into account. The full commutation value will be taxable according to the retirement tax tables. This applies to all types of retirement funds: RAs; pension, provident and preservation funds; as well as compulsory annuities conventional and investment-linked living annuities (ILLAs). This means you should not advise a client with a total retirement interest of R or less to retire from their fund now, unless they confirm in writing they re fully aware of the tax amendments and that they wish to go ahead with the purchase of a compulsory income of two-thirds or more of the available fund interest. o Changes to deductibility of contributions As from 1 March 2015, the total contributions made by an employee and their employer to pension, provident and RA funds will be tax-deductible by the employee. For individuals, the maximum annual deduction from their taxable income will be 27,5%, with an actual monetary limit of R per annum (pa). Employer contributions, including any premiums for approved* group life assurance (part of pension or provident fund benefit), will be added to the member employee s taxable income as a fringe benefit, but they can be included in the deduction of 27,5 %. Contributions in excess of the annual cap may be rolled over for use in years when the member s deductions do not reach the R cap. Members will be able to add the nominal value of any unclaimed additional contribution amounts to the tax-free lump sum at retirement. Sanlam Distribution Academy It starts with us 2

3 Any new contributions made to a provident fund will be subject to the same annuitisation rules that apply to pension funds. This means that at least two-thirds of the savings must be used to buy a pension at retirement. Non-deductible contributions will firstly be applied to any lump sum and the remainder, if any, will be applied to annuities (effective from 1/3/2014). This is applicable only with respect to annuities payable by pension, pension preservation and retirement annuity funds (not by a provident preservation fund, but hopefully this will soon change). This means clients with non-deductible contributions that can be added to the taxfree lump sum should not be advised to take the maximum available tax-free lump sum with the sole purpose of benefiting from the tax-free amount, if the client would have preferred to take an income instead. *Employer contributions to employer-owned income protector and unapproved group life assurance are added to the employee s taxable income as a fringe benefit and from 1 March 2015 the employee will have no deduction on the premiums, but the policy benefits will be tax-free. Delayed tax penalty after pre-retirement withdrawal With the tax-free amount at retirement increased to R , a withdrawal before retirement will have an even more negative impact on the tax payable at retirement. The following amounts are defined as retirement fund lump sum withdrawal benefits: divorce order payments (in the hands of the non-member spouse) withdrawals (including partial withdrawals) from a fund before retirement Example A divorcée was allocated R as a pension interest from the pension fund of her exhusband on 10 June She elected for the fund to transfer the money to her bank account. She hasn t received a taxable lump sum from a retirement fund before. Tax on the R was calculated according to the table applicable to retirement fund lump sum withdrawal benefits below, and amounted to R Sanlam Distribution Academy It starts with us 3

4 Taxable lump sum withdrawal benefits Rate of tax % of taxable income % of taxable income above R R % of taxable income above R R % of taxable income above R When she retired on 30 September 2013 she commuted R of her pension fund benefits. The tax thereupon was calculated as follows: Pension lump sum R Plus: Pension interest (divorce benefit) received in 2012 R R The tax on the aggregated amount is calculated according to the current table applicable to retirement fund lump sum benefits below. Taxable lump sum retirement benefits Rate of tax % of taxable income % of taxable income above R R % of taxable income above R R % of taxable income above R The tax on the aggregated amount is R Less: tax on R according to the retirement fund lump sum benefits table (R 0) Tax on R = R Total tax paid on withdrawal plus retirement (R R85 500) = R Note: It isn t the actual tax that was paid on the R (R85 500) that s deducted, but an adjusted lesser amount based on the current tables. It could even be nil if the amount taxed at the lump sum withdrawal table was R or less. If she had the pension interest of R transferred to her pension fund there would not have been any tax payable on the transfer. If at retirement she then withdrew the R in addition to the R , the tax on R would have been R which is R less than what she s now paying in total on the two amounts. Make sure your client understands the future tax implications should they elect to receive any withdrawal amounts in cash today, particularly if the client is already 55 and has asked for your assistance with a withdrawal. Sanlam Distribution Academy It starts with us 4

5 Cost implications of withdrawals from preservation funds Where a withdrawal is made soon after transfer to a preservation fund, the alteration charges could be significant. In addition to the lump sum taxes payable on the withdrawal amount, these expenses could significantly reduce the net amount. If it comes to the attention of the intermediary that the member intends to exercise a withdrawal immediately after transfer, they must disclose the consequences. Sanlam intermediaries should request a special NUB quotation from Sanlam Life before the preservation fund plan is issued. In terms of the special quote, no commission will be levied on the preservation fund in view of the planned withdrawal amount. In this way the charges to be levied against the withdrawal amount will be lowered. In the case of Glacier, a signed instruction / application form with the client s retirement choices is required to accompany the preservation fund application to avoid duplication of admin fees. Intermediaries are cautioned not to charge intermediary fees twice where it cannot be justified. More amendments effective from 1 March 2015 Changes to provident funds The proceeds from provident and provident preservation funds will be subject to the same rules as that of pension and RA funds. Two-thirds of the proceeds must be used to purchase a compulsory annuity, and only one-third will be available as cash. Vested rights Rights of members younger than 55 on 1/5/2015 will be protected changes will apply only to new contributions and growth thereupon. Members who will be 55 or older on 1 March 2015 will enjoy vested rights on their full fund interest (current fund interest + future contributions + growth on both may be taken in cash at retirement) Changes to preservation funds Treasury has submitted proposals that leave no doubt that the conditions for withdrawals from preservation funds are set to change, with a focus on curbing withdrawals. Vested rights are protected, as are the rights of members who will be 55 or older on 1/3/2015. For more information about the proposed changes to withdrawals from preservation funds, follow the link to this article: Sanlam Distribution Academy It starts with us 5

6 . In the interests of TCF, and to avoid serious future ADVICE RISK complaints against you, ensure that your client has all the facts before he/she makes decisions today that could have a profound effect on their taxability in future Sanlam Distribution Academy It starts with us 6