First of all, let’s highlight two key aspects which are not changing:
- Withdrawal benefits are not impacted. This means employees can still claim their full fund benefit as a lump sum on withdrawal from pension and provident funds, as well as from preservation funds.
- All benefits based on provident fund contributions made before 1 March 2016, and returns thereon, are also unaffected. These are known as “vested rights”.
- Provident fund members must purchase an annuity with two-thirds of their fund balance at retirement (previously only pension fund members were compelled to do this). However this applies only to contributions (plus returns) paid after 1 March 2016.
- For both pension and provident funds,the annuitisation threshold at retirement is R247 500 per fund. This means if a member’s fund balance (or in the case of a provident fund, the non-vested portion) is lower, a lump sum can still be chosen.
(Previously the annuitisation threshold for pension funds was only R75 000.)
- For both pension and provident funds, the tax deduction limit for contributions is 27.5% of the employee’s gross renumeration or taxable income (whichever is higher) subject to a maximum of R350 000 per annum. This limit includes the cost of approved risk benefits.
(Previously, tax deductible contributions were expressed as a percentage of ‘pensionable salary’, rather than total income or remuneration. The deductible rate was 20% for employer contributions to pension and provident funds, whilst 7.5% was deductible for employee contributions to pension funds only.)
How do the reforms affect the take-home pay and tax of members of pension and provident funds?If the Employer chooses to leave contribution definitions and rates unchanged:
- Take-home pay will not be impacted (except for any employees making contributions to a provident fund who will see an increase in their take-home pay as they can now deduct this contribution for tax) .
- Fringe Benefits Tax (FBT) must now be levied on any employer contributions, but PAYE will drop by an equivalent amount. This is because employer contributions can now be deducted by the employee, reducing PAYE.
If the Employer decides to increase contribution rates:
- Take-home pay will be reduced, but the employee will receive a higher tax deduction up to the new tax deductibility limit.
- FBT will be levied on any employer contributions, but PAYE will reduce by an equivalent amount if contributions do not exceed the deductibility limit. Beyond this limit, the FBT will not be offset.
The tax deduction limit for pension and provident contributions is defined as a percentage of remuneration or taxable income, whichever is the greater. Remuneration encompasses everything paid by the employer, including salaries, bonuses, overtime, leave encashment, incentives, fringe benefits etc. Taxable income includes income from employment, private business or trade, investment income, rental income, annuities, pensions etc.
Any contributions made by an employee to a retirement annuity separately from the Employer’s retirement arrangements also count towards the 27.5% tax deduction limit.
Therefore ultimately the onus will be on the employee to pull the total picture together from their personal tax perspective, given that they could have additional income as well as retirement annuity contributions that the Employer will not be aware of.
What are the main considerations for the employer?- The employer should communicate the impact of these reforms to employees, highlighting what is not changing to avoid any unnecessary anxiety.
- The company can fully deduct ALL employer contributions to the company’s pension or provident fund for tax purposes, without limit.
- Any decision to change contribution rates or definitions of pensionable salary will require Special Rules and Service Level Agreement changes (with time and cost implications). The Employer can of course choose to leave these definitions unchanged as explained above.
- With effect from 1 March 2016, Fringe Benefits Tax on any employer contributions will need to be incorporated into payroll processes, as well as any increased tax deductibility of contributions.
- Pension funds can now transfer to provident funds without tax consequences. For some Employers this might present opportunities to simplify and increase cost efficiencies by merging legacy pension and provident arrangements.
In addition to helping communicate the reforms, one of the biggest implications for fund administrators is the need to keep track of vested rights. Section 14 transfers will also need to provide this additional information.
The good news is that we have already adjusted our administration systems to keep track of vested rights. In addition to the attached communication, we will be discussing the reforms at upcoming client meetings. Please also look out for our Annual Review newsletter coming your way soon with a special focus on the implications of the reforms for members.
For a more comprehensive overview, see our publication on the impact of these retirement reforms.
