PENSION TAX REFORMS BECOMES PENSION OPPORTUNITIES TO ALL

Did you knock on the SARS door to obtain 27.5 % SARS rebates from 1 March 2016.

If not it is time to be in contact with your financial advisor to still catch 11 month of the 2015/2016 tax year from 1 April 2016 and no this is not an April Fools Joke!!

  "Do not resign or withdraw your  cash in your provident or pension fund out of fear but m aintain your retirement fund status quo while taking huge opportunities on upcoming SARS rebates as this part of the Act has been postponed to 2018 either way "

If you are uncertain please take the time to be in contact with your own financial professional or any one of the 7 000 advisors linked to my LinkedIn Network  or an advisor registered with the Financial Planning Institute and face your fears head on with experience.

"Get advice no matter what and protect you and your family and your long term retirement plan".

Let me start with an absolute reassurance to the public, company employees and retirement fund members that The Taxation Laws Ammendment Act, 2015 which has been passed and will bring some of Government’s Retirement Reform proposals into law on 1 March 2016 is a huge positive development within the South African retirement planning environment. Everything will indeed be ok!

Let me also categorically as a Certified Financial Planner Professional dismiss all speculations that the governments plans to reform the local pension fund industry are a threat or time bomb to members' savings. I can assure you that all members’ capital is safeguarded and Government has no access or rights to such moneys under the Pension Fund Act. 

Members and the fund trustees will always be the custodians to safeguard capital in  pension and provident funds and the same goes for preservation funds as well as retirement annuities.

It is extremely concerning to us as professional financial advisors to take grave note of malicious rumours in the public space which is negligent at best and is creating unfounded fears and no matter the social status of the member.

There are anecdotal evidence that employees are resigning from their jobs in order to cash in their pensions and provident funds and this is mainly due to fears they are being fed that they will soon not be able to access any of their benefits until retirement ( before age 55)  and at retirement date ( after age 55) on provident funds only get 1/3 rd of the capital or that government has some intention of nationalising pension funds. There are no doubt that such perceptions and believes are absolutely misguided.

I like to refer to an extract from our past Finance Minister, Nene:

“Government respects the fact that these retirement funds belong to their members,” Nene said.

“Government has never had, and does not have, any intention to nationalise these funds. Rumours to this effect are a blatant lies. So are the rumours that government has changed the laws on preservation before retirement.”

Members and employees should take note and we as advisors should educate as much as possible through social media and similar to protect the public from rumours and scrupulous advisors who want people to withdraw capital so they can re-invest it for them and receive commission or fees.

The full proposed retirement reform rules will not be coming into place on 1 March 2016 as initially proposed but only certain sections.

One of the major concerns was the compulsory preservation of funds on resignation of all members’ funds but as the law will not change at this stage to mandate  members to preserve I will not dwell on this part to much. So employees will still have the right to cash their pension and provident funds ( which is never recommended either way of the reform) when they resign their jobs and even if Government were to promulgate further laws in future such changes would always recognise vested rights and therefore will not be retrospective of nature.

The same rules will apply to the compulsory annuitisation of provident and pension funds when the member takes retirement from 1 March 2016 under the new laws. In simple terms it means members have to invest at least two-thirds of their benefits into a monthly income at retirement to generate a pension income for life.

This rule already apply to pension funds but will now incorporate provident funds as well. It will however not be applied retrospective to all capital invested before 1 March 2016 and will now only apply to recurring contributions made after 1 March 2016. Any amount accrued from 1 March 2016 under R 247 000 will also be exempted from the 2/3 rd rule

It would be important for employers to tread the fine line between assisting employees and giving them financial advice and it would be  best to get expert financial advice. It is suggested that employers take urgent action on member education before 1 March 2016 and use financial professional rather. The “wait and see” approach can now be dropped.

As financial advisors we want to appeal to South Africans not to act in a way that not only jeopardises their own well-being but also their families. It would be negligent and very risky to resign from your current jobs to cash in your retirement funds but then end up being unemployed ( many government employees and especially teachers believe they can resign and get re-employed again) and losing your security of an income and worse of all using your capital to survive.

If you then further consider the huge capital losses due to tax payable between 18-41 % during withdrawal and the loss of the powerful compound growth effect due to early withdrawal then it should be the last thing on your mind because of unfounded rumours and misunderstanding of the law.

I have picked up a very concerning trend as well under the “clean break” rule on divorce. Spouses are actually getting divorced to get access to 50 % of their compulsory retirement funds capital. Amazing to even contemplate but it is happening for sure.

I think it is pertinent to understand the main reasons for the retirement reform which is to reform the pension fund industry. Although many of us believe the industry is working sufficiently there are areas of concerns and the reform hopes to address the poor savings rate and dilution of long term capital and protection of pension capital. This should in future generations reduce the pressure on the social grant system and taxpayers liabilities.

The problem is that most South Africans save mainly through their retirement funds but are very quick to withdraw and spend their retirement savings in full at retirement date while paying huge taxes during such withdrawals on provident funds which leave such pensioners very vulnerable during their “golden years” and one of the main reasons why less than 6  % of employees in South Africa will be able to retire comfortably.

At the same time The Taxation Laws Amendment Act, 2015 has passed some of Government’s retirement reform proposals into law that are designed to harmonize the tax treatment and annuitisation requirements for all types of retirement funds inclusive of pension, provident and retirement annuity funds.

Therefore from 1 March 2016 the allowable SARS deduction for retirement fund contributions will increase to a 27.5% subsidy and this will apply to the aggregation of all contributions made to pension, provident and retirement annuity funds with a capitation of R350 000 per annum. Individuals who contribute more in any one year can carry forward any unclaimed amount and deduct these from tax in subsequent years and unclaimed contributions will increase the R 500 000 tax free amount after age 55.

I really hope this publication will assist the public and members to not fear the retirement reforms coming in place on 1 March 2016.