Retirement Reform Proposals

Taxation Laws Amendment Bill (TLAB), 2015

Over the last three years, the National Fund for Municipal Workers (NFMW) has on numerous occasions communicated progress on retirement reform proposals by National Treasury, with specific reference to “T-day” proposals. “T-day” amendments will ensure consistent tax treatment for all retirement fund types. The regulations were initially scheduled for implementation in March 2015, but were postponed amid concerns that members would not have access to their pension benefits prior to retirement once the new regulations had been introduced. This fuelled premature resignations to access retirement funds.

Amendments in the 2015 TLAB indicate 1 March 2016 as the new implementation date. Please, however, remember that as per all previous discussions and communication – vested rights will be protected and there is therefore no need for members to resign.

The legislative amendments enacted include:

• Compulsory annuitisation at normal retirement age for all members of retirement funds, with protection of existing provident fund rights for members over the age of 55 and for those under the age of 55, on accumulated savings up to the implementation date of 1 March 2016, plus growth earned thereafter. As annuitisation is only applicable to retirement benefits, resignation benefits will not be affected in any way.
• A new tax relief dispensation for contributions to retirement funds consists of a total deduction of 27.5% of the greater of remuneration or taxable income, limited to a maximum of R350 000 per annum and roll-over relief for excess contributions. Please note that the 27.5% is based on total taxable income and not calculated on pensionable salary. It is not foreseen that any member in the NFMW will be affected negatively on this matter. The legislation amendments are furthermore clear that this regulation will include Paragraph A municipal retirement funds.
• The fully commutable threshold increased from R75 000 to R247 500. This means that provident fund members will only be able to take one third of their pension benefit (if the benefit of contributions and returns exceeds R247 500) accumulated from 1 March 2016 as a cash lump sum at retirement and that the remaining two thirds will have to be annuitised. The R247 500 allowable cash benefit will be in addition to the full value vested up to 29 February 2016. The NFMW’s vested benefits are not affected.

The National Fund for Municipal Workers has already taken all required steps to ensure that the fund will be in a position to implement “T-day” on 1 March 2016.

The implementation of “T-day” has two significant implications for retirement fund members:

• It will harmonise the tax deductibility of retirement fund contributions; and
• It will change provident funds’ benefit structures into pension fund benefit structures (also referred to as compulsory annuitisation), subject to the protection of vested rights.

Retirement funds remain tax and cost efficient investment vehicles – especially larger retirement funds like the NFMW that benefit from economies of scale.

Provident fund members will not be affected by compulsory annuitisation immediately. All new contributions will effectively be paid into a pension fund type benefit structure, but vested rights (the amount of the retirement benefit that may be taken in a lump sum) will be protected. Whatever the member’s retirement benefit in a provident fund is at the end of February 2016 will be “protected”. Even where a member will retire many years after “T-day”, he/she will be able to take that amount as well as the growth thereon as a lump sum benefit. It will take the average fund member many years for new contributions and growth thereon to reach the commutable threshold amount of R247 500 (as explained above). Members who are 55 years and older on “T-day” will not be affected if they remain in the same provident fund regime.

The reform proposals are part of a broad overhaul of the retirement industry, which aims to encourage household savings and improve the financial situation of especially vulnerable individuals.

Treasury has reiterated that the formulation of new regulations were not an effort to nationalise pension funds. Treasury also said it had no intention of introducing preservation “through the back door”. The law has not changed to prevent members of provident and pension funds from accessing their retirement savings upon resignation, including upon dismissals or retrenchments. The legislative amendments therefore do not implement any compulsory preservation.

The fund advises members to not make any rash financial decisions if they have any concerns, and they should rather contact the fund for further clarity. Members cashing out their savings will not only pay significant amounts of unnecessary tax, but will lose out the growth on their savings and will need to save significantly more in future if they wish to safeguard their standard of living in retirement.

Yours sincerely

Sean Samons: Principal Officer