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Retirement reform

The Finance Minister indicated that Government will seek to improve coverage and preservation of retirement funds and lower costs in the system. They are currently consulting with NEDLAC on measures to cover the six million employed South Africans who do not enjoy access to an employer-sponsored retirement plan. Government intends to move progressively towards a mandatory system for retirement provision for all employed workers. A document that briefly describes the retirement reform changes up to this point and sets out anticipated future reforms will soon be released by Government.

The formula used to estimate the taxable contribution amount in defined benefit funds was legislated in 2013. The methodology of calculating the formula will be detailed by way of regulation in 2014.

In addition, the policy approach for the timing of accrual of retirement fund benefits will be reviewed to provide certainty and ease practical application. It would appear that what the Finance Minister has in mind is a review of the requirement that taxpayers must annuitise when they retire, even if they embark on a second career and do not need a pension at that time.

Agreement has been reached with the Association of Savings and Investment of South Africa (ASISA) on a way forward to reduce the level of charges for retirement savings products. Draft regulatory reforms will be published shortly.

 

Retirement fund lump sum tax tables

The Finance Minister announced adjustments to the retirement fund tax tables with effect from 1 March 2014. The tax tables were introduced in 2007 and have not been adjusted since, with the exception of the retirement / death tax table which was adjusted by 5% in 2011.

It is proposed that the lump sum brackets be increased by about 10%. The single biggest adjustment is the increase in the retirement / death tax table of the tax-free amount from R315 000 to R500 000. The tax-free amount in the withdrawal tax table has also been increased from R22 500 to R25 000. The large increase in the bottom bracket of the retirement / death tax table is to avoid instances where low income workers may be required to pay tax on their lump sum, even though they did not benefit from a deduction due to their taxable income falling below the tax-free threshold.

See Annexure A for an extract of the tax tables.

 

Tax-preferred savings accounts

Legislation to allow for tax-preferred (exempt) savings accounts will proceed this year.

The tax-preferred savings accounts were first mooted in the 2012 Budget Review as a measure to encourage household savings. As previously announced, these accounts will have an initial annual contribution limit of R30 000, to be increased regularly in line with inflation, and a lifetime contribution limit of R500 000. The account will allow investments in bank deposits, collective investment schemes, exchange-traded funds and retail savings bonds.

Eligible service providers will include banks, asset managers, life insurers and brokerages.

 

Personal income tax relief

Government proposed to reduce personal income tax by R9.3 billion to compensate partially for inflation. Most of the relief is provided to taxpayers in lower income brackets.

The primary rebate for individuals will be increased from R12 080 to R12 726 and the secondary rebate (for those aged 65 and older) from R6 750 to R7 110. A third rebate for those older than 75 has been increased from R2 250 to R2 367. Income tax brackets will be adjusted to offset the effects of bracket creep. Income tax thresholds have been raised from R67 111 to R70 700 for below age 65 and from R104 611 to R110 200 for those aged 65 and older. For those aged 75 and older, the threshold will increase from R117 111 to R123 350.

 

Medical schemes contributions

Monthly tax credits will be increased from R242 to R257 per month for the first two beneficiaries and from R162 to R172 for each additional beneficiary with effect from 1 March 2014.

 

Social grants

Old age grants will increase from R1 270 to R1 350 per month from 1 April 2014. Child support grants will be increased from R300 to R310 per month in April 2014 and to R320 in October 2014.

 

Long-term insurance risk policies

Reforms to the tax treatment of risk business for long-term insurers are proposed. Profits from the risk business of a long-term insurer will be taxed in the corporate fund, similar to the way in which short-term insurers are taxed. Government will also review the fairness of taxation of the individual policyholder fund, where a 30% tax rate is applied, irrespective of the income level of policyholders.

 

Contributors:

Anton Swanepoel, Danie van Zyl, Kobus Hanekom, Carien Veenstra, Mayuri Reddy.

 

Annexure A

Extract from the budget review:

Pre-retirement and Retirement lump-sum taxation 2013/2014 - 2014/2015 

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