1. I am a member of a pension fund. How will the T-Day changes affect me?

Transcription

1 T-Day - Retirement reform and tax changes We unpack the changes in the taxation laws from 1 March 2016 and assist members of retirement funds with a set of questions and answers on how these changes might affect them. Questions and answers for pension fund members 1. I am a member of a pension fund. How will the T-Day changes affect me? T-Day will harmonise and equalise the tax deductibility of contributions to pension, provident and retirement annuity funds. As a result - You may enjoy contribution flexibility for the first time Most members who use a retirement calculator and discover that they may not be saving sufficient for retirement, are not in a position to increase their contributions at present primarily because tax legislation does not allow for this outside a total cost to company remuneration approach. From 1 March 2016 however, any member will be able to request an increase in contributions and will enjoy a tax deduction up to the new threshold (assuming their fund rules allow additional voluntary contributions). Your pay slip will look different Your employer s contributions are deemed to have been made by you and will be shown as a fringe benefit on your pay slip / IRP5. The amount will however be deductible by you and you will not be out of pocket - unless you contributed more than the new thresholds of 27.5% of the greater of remuneration or taxable income, or more than the new maximum of R per annum. You can only make deductible contributions up to a maximum of R pa in future T-Day may not be good news for fund members who earn more than R pa and make contributions of 27.5% of remuneration. They will be entitled to continue contributing 27.5% of remuneration but will be affected by the new rand cap of R pa. This is a cumulative maximum for all retirement fund contributions. Higher income earners will therefore have to aggregate their contributions, including those to retirement annuity funds and decide on a strategy going forward. 2. Will I still be able to take all my money in cash when I resign and leave service after March 2016? Yes, you can. Whatever amount you could take as a cash lump sum if you resigned at the end of February 2016, will continue to be available to you in cash whenever you resign in the future. The right to take your withdrawal benefit in cash is not affected by T-day. 3. Will I be paying more income tax from 1 March 2016 as a result of the T-Day ax changes?

2 No. The fact that employer contributions will be taxed in your hands as a fringe benefit is cancelled out by the fact that you will receive an increased deduction of up to 27.5% of your total remuneration (or your taxable income if that is higher) in respect of your own contributions as well as any contribution made by your employer. Before T-Day you only enjoyed a 7.5% employee contribution deduction. You will however pay more tax if your annual contribution exceeds R What do I have to do to benefit from the T-Day changes? To be able to benefit from the generous 27.5% tax deduction available to members from 1 March 2016, you need to increase you contributions to enjoy a greater tax deduction. 5. Will I be able to make greater deductible contributions to my pension fund? According to the Sanlam Employee Benefits Benchmark Survey the average contribution rate is in the order of 15% of pensionable annual remuneration (PEAR). The average member therefore has significant scope to increase tax deductible contributions. There are three important considerations: Firstly, the tax deduction thresholds are the same. The detail: Pension fund members now enjoy a 27.5% deduction iro all employer and employee contributions. Before T-Day the employer enjoyed 20% deduction and members a 7.5% deduction. The exception: A maximum deduction of R pa has been introduced. That means that persons who earn more than R and contribute for example 27.5% of remuneration (not PEAR as discussed below) (R x 27.5% = R ) will be limited to the Rand cap of R pa. Secondly, many members now enjoy contribution flexibility for the first time. This essentially means that a member can make additional voluntary contributions that are deductible up to 27.5% - if their fund rules provide for it. The detail: The old concept of a maximum Additional Voluntary Contribution (AVC) deduction of R1 800 pa has been scrapped. When we talk about AVC s after T-Day we refer to the member s ability to request HR to deduct a greater contribution over and above the normal compulsory contributions. Thirdly, contributions are typically calculated on PEAR at the moment. The new 27.5% threshold is based on remuneration as defined in the Income Tax Act. These two concepts are very different. The detail: Remuneration includes all remuneration earned by an employee such as fringe benefits, additional bonuses or commissions. The closest proxy for remuneration is total guaranteed package ( TGP). Because PEAR is typically only 80% (or less) of TGP, there will be even more capacity to increase tax deductible contributions. Example: A 27.5% contribution based on PEAR is only a 22% contribution based on TGP if PEAR is 80% of TGP). If your TGP is: R And your PEAR is: R % of PEAR is: R R is 22% of TGP. 2

3 6. How do I make additional voluntary contributions? Any member can increase their contributions in order to address their retirement needs, if their fund rules allow it. It is recommended that members use the additional voluntary contribution or AVC procedure for this purpose. Make a request to your HR office in writing to make an additional contribution to your fund, over and above the current employer and employee contributions. You will be able to review these additional contributions from time to time. (Please remember that you can only make additional contributions via your employer s payroll. A direct deposit into the fund s bank account is not allowed.) The detail: The old concept of a maximum AVC deduction of R1 800 p.a. has been scrapped. When we talk about AVC s after T-Day we refer to the member s ability to request HR to deduct a greater contribution over and above the normal compulsory contributions. 7. How will contributions that exceed the new maximums be treated? For example, I am paying 7.5% and my employer is paying 30%. Would the difference of 10% be seen as a fringe benefit and taxed in my hands? Any contribution paid by an employer is taxed as a fringe benefit and deemed to have been made by the member. Under a DC fund the fringe benefit is equal to the amount of the contribution. The total contributions made will therefore be 37.5% (30% + 7.5%). Only 27.5% will be allowed as a deduction in one tax year for the benefit of the member. The detail: Your employer contribution will be shown as a fringe benefit on your payslip / IRP5. Your employer will get a tax deduction for the full contribution in terms of section 11(l) of the Income Tax Act. The amount will however be deductible by you (because it is deemed to have been made by you) as long as it does not exceed the new thresholds. If it is not deductible you will be out of pocket since you will be paying tax on the contributions made above the new thresholds. However upon your resignation or retirement you will enjoy tax relief in respect of contributions that were not deductible. It is important to be clear on the amount that the contribution is calculated on. The 27.5% should be calculated on your remuneration or taxable income, whichever is the greater. The current 37.5% contribution you refer to is in all likelihood based on your PEAR. The detail: PEAR is typically 80% of your total guaranteed remuneration (TGP) (but it can be less). If that is the case the correct calculation will be that a contribution of 30% of TGP was made -TGP being the closest proxy for remuneration. Example 1: If your TGP is: R And your PEAR is: R PEAR as a % of TGP is: 80% 37.5% of PEAR is equal to 30% of TGP (37.5% x 80%) In this example you would be contributing 2.5% more than the maximum tax free contribution percentage and would therefore not receive a tax deduction for the additional 2.5% which is taxed in your hands as fringe benefit. Example 2: If your TGP is: R And your PEAR is: R

4 4 PEAR as a % of TGP is: 66.7% 37.5% of PEAR is equal to 25% of TGP (37.5% x 66.7%) In this example your total contribution amount is below the maximum tax free contribution percentage and therefore you will be allowed to receive the full tax deduction. Any amount not deducted can be rolled over to a next year. So in example 1, the 2.5% additional contribution can be rolled over to a next year. The nominal value of amounts not rolled over will be available to be offset against any lump sum at withdrawal or lump sum or annuity benefit at retirement. 8. What do I have to do to protect myself from the T-Day changes? No action is necessary unless you make contributions of more than R pa and prefer to make these investments outside the fund. In such a case make sure that your total contributions do not exceed the 27.5% or the R pa threshold, by reducing your contributions. Based on calculations made by Simeka Consultants & Actuaries, the tax efficiency of a retirement fund investment in excess of the R Rand cap will be more or less on par with the tax treatment of an investment in a collective investment scheme / unit trust. The latter is totally under the member s control but there are certain drawbacks e.g. that such investment will not be protected against creditors and is subject to estate duty. 9. Could I do better if I was able to invest my retirement savings myself? The short answer is no. Firstly, retirement funds are virtual tax havens. You will not find a more taxefficient saving vehicle in South Africa. Secondly, retirement funds are wholesale operations that enjoy lower institutional prices and economies of scale. National Treasury is proposing a whole range of measures to reduce the costs even further. Thirdly, retirement funds, as a form of contractual saving, are super convenient and efficient. Membership and contributions to occupational funds are arranged, investments are made and benefits will be paid whether the member pays any attention to it or not.

5 5 Questions and answers for provident fund members 1. I am a member of a provident fund. How will the T-Day changes affect me? A: T-Day will harmonise and equalise the tax deductibility of contributions to pension, provident and retirement annuity funds. Increased deductible contributions You can now make higher deductible contributions (27.5% up from an employer only maximum deduction contribution of 20% - no deduction for member contributions) and you will enjoy contribution flexibility for the first time. Your pay slip will look different Your employer s contributions are deemed to have been made by you and will be shown as a fringe benefit on your pay slip / IRP5. The amount will however be deductible by you and you will not be out of pocket - unless you and/or your employer contributed more than the new thresholds of 27.5% of the greater of remuneration or taxable income or more than the new maximum of R pa. If you currently make contributions to the fund your take-home pay may increase as these contributions will be deductible in future. You may enjoy contribution flexibility for the first time Most members who use a retirement calculator and discover that they may not be saving sufficient for retirement, are not in a position to increase their contributions at present primarily because tax legislation does not allow for this outside a total cost to company remuneration approach. From 1 March 2016 any member will be able to request an increase in contributions and will enjoy a tax deduction up to the new threshold (assuming their fund rules allow for additional voluntary contributions). You can only make deductible contributions of a maximum of R pa in future T-Day may not be good news for fund members who earn more than R pa and contribute 27.5% of remuneration. They will be entitled to the same tax deductibility (i.e. the same percentage) but will be affected by the new rand cap of R p.a. This is a cumulative maximum for all retirement fund contributions. Higher income earners will therefore have to aggregate their contributions, including those to retirement annuity funds and decide on a strategy going forward. There are alternatives, but none as effective as making deductible contributions. B: T-Day introduces changes to the benefit structure of provident funds. Annuitisation requirements Contributions paid to a provident fund after 1 March 2016 will effectively be paid into a pension fund type benefit structure. That means that on retirement you can only take one third as a lump sum and the remaining two thirds must be used to purchase an annuity (the exception regarding 55 years and older will apply) iro the contributions post 1 March 2016 and growth thereon. The government has however increased the de minimis amount from R to R for pension, provident, and retirement annuity funds. This means that if the benefit consisting of

6 contributions paid after 1 March 2016 and growth thereon is not more than R you can take the entire amount in cash in respect of each fund that you retire from. Depending on your level of income it could take another 5 to 10 years or so before you will be compelled to buy an annuity. If you are 55 and or older on 1 March 2016 these annuitisation requirements will also not apply to you while you remain in that the same provident fund. Existing lump sum benefits protected All the benefits in a provident fund that a member has at the end of February 2016 will be protected. The amount - and the investment return thereon can still be taken in a cash lump sum at any time in the future. If you transfer to another fund, these benefits should retain their status (the special provisions i.r.o persons 55 and older will however only apply if they remain members of that provident fund). When a provident fund member retires in a few years time they will firstly be able to take as a lump sum, the benefit in the fund as at 1 March 2016 plus the growth thereon. In addition to this, one third of the benefit accumulated after 1 March 2016 and growth thereon - or the entire amount, if it is not more than R Will I still be able to take all my money in cash when I resign and leave service or retire after March 2016? Yes, you can. Whatever amount you could take as a lump sum if you resigned at the end of February 2016, will continue to be available to you in cash whenever you resign or retire in the future - together with the investment growth thereon. 3. Will I be paying more income tax from 1 March 2016 as a result of T-Day changes? No. In fact, if you make member contributions to the fund you may enjoy a tax deduction and a greater take home pay. The fact that employer contributions will be taxed in your hands as a fringe benefit is cancelled out by the fact that you as member will receive an increased deduction of up to 27.5% of your total remuneration (or your taxable income if that is higher) in respect of your own contributions as well as any contribution made by your employer. Before T-Day you enjoyed no employee contribution deduction. You will however pay more tax if your annual contribution exceeds R What do I have to do to benefit from the T-Day changes? To be able to benefit from the generous 27.5% tax deduction available to members you need to increase you contributions to enjoy a greater deduction. 5. Will I be able make greater deductible contributions to my provident fund? According to the Sanlam Employee Benefits Benchmark Survey the average contribution rate is in the order of 15% of pensionable annual remuneration (PEAR). The average member therefore has significant scope to increase tax deductible contributions. There are three important considerations: Firstly, the tax deduction thresholds have increased. 6

7 7 The detail: For provident fund members the total deductible contribution is 7.5% more (27.5% instead of the current 20% for employer and 0% for employees). The exception: A maximum deduction of R pa has been introduced. That means that persons who earn more than R and who contribute for example 27.5% of remuneration (not PEAR as discussed below) (R x 27.5% = R ) will be limited to the rand cap of R p.a. Secondly, many members now enjoy contribution flexibility for the first time. This essentially means that a member can make additional voluntary contributions that are deductible up to 27.5% - if their fund rules provide for it. The detail: The old concept of a maximum Additional Voluntary Contribution (AVC) deduction of R1 800 pa has been scrapped. When we talk about AVC s after T-Day we refer to the member s ability to request HR to deduct a greater contribution over and above the normal compulsory contributions. Thirdly, contributions are typically calculated on PEAR at the moment. The new 27.5% threshold is based on remuneration as defined in the Income Tax Act. These two concepts are very different. The detail: Remuneration includes all remuneration earned by an employee such as fringe benefits, additional bonuses or commissions. The closest proxy for remuneration is total guaranteed package (TGP). Because PEAR is typically only 80% (or less) of TGP, there will be even more capacity to increase tax deductible contributions. Example: A 27.5% contribution based on PEAR is only a 22% contribution based on TGP if PEAR is 80% of TGP. If your TGP is: R And your PEAR is: R % of PEAR is: R R is 22% of TGP. 6. How will contributions that exceed the new maximums be treated? I want to pay 7.5% and my employer is paying 30%. Would the difference of 10% be seen as a fringe benefit and taxed in my hands? Any contribution paid by an employer is taxed as a fringe benefit and deemed to have been made by the member. Under a DC fund the fringe benefit is equal to the amount of the contribution. The total contributions made will therefore be 37.5% (30% + 7.5%). Only 27.5% will be allowed as a deduction in one tax year for the benefit of the member. The detail: Your employer will get a tax deduction for the full contribution in terms of section 11(l) of the IT Act. The employer contribution is deemed to have been made by you and will be shown as a fringe benefit on your pay slip / IRP5. The amount will however be deductible by you as long as it does not exceed the new thresholds. If it is not deductible you will be out of pocket since you will be paying tax on the contributions made above the new thresholds. However upon your resignation or retirement you will enjoy tax relief in respect of contributions that were not deductible.

8 It is important to be clear on the amount that the contribution is calculated on. The 27.5% should be calculated on your remuneration or taxable income, whichever is the greater. The current 37.5% contribution you refer to is in all likelihood based on your PEAR. The detail: PEAR is typically 80% of your total guaranteed remuneration (TGP) (but it can be less). If that is the case the correct calculation will be that a contribution of 30% of TGP was made -TGP being the closest proxy for remuneration. Example 1: If your TGP is: R And your PEAR is: R PEAR as a % of TGP is: 80% 37.5% of PEAR is equal to 30% of TGP (37.5% x 80%). In this example you would be contributing 2.5% more than the maximum tax free contribution percentage and would therefore not receive a tax deduction for the additional 2.5% which is taxed in your hands as fringe benefit. Example 2: If your TGP is: R And your PEAR is: R PEAR as a % of TGP is: 66.7% 37.5% of PEAR is equal to 25% of TGP (37.5% x 66.7%). In this example your total contribution amount is below the maximum tax free contribution percentage and therefore you will be allowed to receive the full tax deduction. Any amount not deducted can be rolled over to a next year. So in example 1, the 2.5% additional contribution can be rolled over to a next year. The nominal value of amounts not rolled over will be available to be offset against any lump sum at withdrawal or lump sum or annuity benefit at retirement. 7. How do I make additional voluntary contributions? Any member can increase their contributions in order to address their retirement needs, if their fund rules allow it. It is recommended that members use the additional voluntary contribution or AVC procedure for this purpose. Make a request to your HR office in writing to make an additional contribution to your fund over and above your current contributions. You will be able to review these additional contributions from time to time. (Please remember that you can only make additional contributions via your employer s payroll. A direct deposit into the fund s bank account is not allowed.) The detail: The old concept of a maximum AVC deduction of R1 800 pa has been scrapped. When we talk about AVC s after T-Day we refer to the member s ability to request HR to deduct a greater contribution over and above the normal compulsory contributions. 8. What do I have to do to protect myself from the T-Day Changes? The new deduction thresholds 8

9 No action is necessary unless you make contributions of more than R pa and prefer to make these investments outside the fund. In such a case make sure that your total contributions do not exceed the 27.5% or the R pa threshold, by reducing contributions. Based on calculations made by Simeka Consultants & Actuaries, the tax efficiency of a retirement fund investment in excess of the R rand cap will be more or less on par with the tax treatment of an investment in a collective investment scheme / unit trust. The latter is totally under the member s control but there are certain drawbacks e.g. that such investment will not be protected against creditors and is subject to estate duty. The changes to the provident fund benefit structure Your right to take current benefits in cash when you retire are protected in law. The fund will keep track of these amounts for you. Nothing you do now is likely to give you more protection than you already have in terms of the legislation. The money is already in the most tax and cost effective investment vehicle available to you in SA. As for future contributions there will only be one type of benefit structure for retirement funds. Whether you pay contributions to a provident fund, a pension fund or a retirement annuity fund the position will be exactly the same. You will be required to purchase an annuity with two thirds of the money unless the amount is not more than the de minimis of R in which event you can take the entire amount in cash. 9. Could I do better if I was able to invest my retirement savings myself? The short answer is no. Firstly, retirement funds are virtual tax havens. You will not find a more tax-efficient saving vehicle in South Africa. Secondly, retirement funds are wholesale operations that enjoy lower institutional prices and economies of scale. National Treasury is proposing a whole range of measures to reduce the costs even further. Thirdly, retirement funds, as a form of contractual saving, are super convenient and efficient. Membership and contributions to occupational funds are arranged, investments are made and benefits will be paid whether the member pays any attention to it or not. 9 Issued: January 2016