Retirement tax reform

Also known as The Commutation of Benefits, there are some big changes coming for retirement and provident fund holders. Essentially, these all relate to how the money is drawn (commuted) or re-invested.

After being delayed by a year, the Taxation Laws Amendment Act is being put into place on 1 March 2016 (‘T-day’). The legislation changes seek to balance out the tax treatment for the different types of retirement funds.

First, there are changes on how much of your retirement benefit you can access as a full cash lump sum at retirement.

  • The minimum rand threshold (commutation threshold) at which you can take your retirement benefit as a full cash lump sum will be increased from R75 000 to R247 500 for all retirement funds.
  • This means that if your retirement benefit is R247 500 or less, you will be allowed to take your full benefit (commute) as a cash lump sum. You will not be required to buy an annuity with at least two-thirds of this benefit.
  • This will apply to all types of retirement funds.
  • In the case where a person is already receiving a monthly annuity payment, that person is currently allowed to commute their annuity to a cash lump sum payment if the total value of their annuity is R75 000. Subject to confirmation from SARS it is anticipated that from T-day this amount will be also be increased to R247 500.

Second, provident funds will be subject to certain special rules for ‘vested benefits’ as detailed below.

  • Members of provident funds or preservation provident funds are currently entitled to receive their benefits as cash lump sums at retirement.
  • The fund benefits (retirement savings) of all provident fund and preservation fund which have accumulated up to T-day, plus the future growth on this fund value will be regarded as ‘vested benefits’.
  • All contributions and growth thereon which accumulate after T-day will not comprise vested benefits and you will only be able to take out 1/3 of the benefits accumulated after T-day as a cash lump sum payment. The remaining 2/3 must be used to buy an annuity that will pay you a monthly pension or annuity.

Third, members aged 55 years on T-day have the right to additional vested benefits.

  • This means if you are 55 years or older on T-day AND you remain a member of the same provident fund, you will not be affected by these legislative changes. You may still receive your entire retirement benefit as a cash lump sum at retirement.
  • If you transfer out of your provident fund to another retirement fund after T-day you will only be entitled to your fund value (retirement savings) as at the time of transfer (plus growth) as a cash lump sum on retirement from that subsequent retirement fund.

Fourth, as a result of the tax harmonisation of retirement funds, tax neutral transfers between different retirement funds will be possible from T-day:

  • Transfers between all retirement funds, other than from a retirement annuity fund, will be permitted on a tax neutral basis. This means that transfers from pension to provident funds for instance, will now be allowed without any adverse tax consequence.
  • A member in a retirement annuity fund will still only be able to transfer to another retirement annuity fund. The reason for this exception is that a retirement annuity fund has a restriction that no other retirement fund has – a member in this fund can only take a withdrawal before retirement age under very limited circumstances.

It is important to remember that this change takes place after T-day. Any transfers from pension to provident funds BEFORE this date will NOT be tax neutral.

I realize that there is a lot of info here, so if you have any questions we can discuss them over coffee. Let’s get in touch!

Posted in Tax FAQ's.