By Debbie Netto-Jonker, The Weekender

South Africa

March 17, 2008

The entire retirement fund saving system in SA is being overhauled. The changes to the retirement fund regime started a few years ago with the reduction and eventual elimination of retirement fund taxes. These taxes were initially levied at 18%. 

In a country where government funding for retirement is not high on the priority list, personal retirement fund savings need all the help they can get. 
Retirement fund legislation has been complex for the lay person to understand, because each of the three tax structures has its own benefits and tax consequences. 

At present, employers may claim as a tax deduction contributions to an employee’s retirement fund, up to 20% of the employees’ pensionable income. 
Members of pension funds may contribute up to 7,5% of their pensionable income and members of retirement annuity funds may claim up to 15% of their non-pension funding income.

These rules favour higher income earners — the more you earn, the higher your deduction. The new regime is likely to place a monetary limit on the amount you may contribute and claim as a deduction. 

At retirement, the taxation of lump sums has already been greatly simplified in order to give you far more tax-free proceeds than ever before. Since October last year the first R300000 you withdraw (plus any previously nondeductible contributions, plus any tax-free amounts accrued by government employees) are tax-free. 

The next R300000 you withdraw is taxed at 18%; the third R300000 you withdraw is taxed at 27%; and amounts over R900000 are taxed at a flat rate of 36%. 

There has been confusion about whether divorced spouses have access to their portion of a retirement fund immediately after a divorce. Since September last year there has been legislation regulating this, but most pension funds are not allowing former spouses access to their share of benefits, as they would like clarity on taxation and benefit calculations. All these issues should be finalised by the end of this year, and divorced spouses should be able to choose whether to transfer the retirement capital to a new retirement fund without paying tax. 

The new legislation will allow divorcees to plan and to be in charge of their financial destinies.One of the anomalies of our retirement fund system is that if members of a pension fund or provident fund emigrate before they reach retirement, they have the option to resign from their pension or provident fund, pay the tax, convert their retirement savings to cash and apply for the necessary foreign exchange. 

However, until now, members of retirement annuity funds did not have this option. In terms of their rules they are members until they reach the age of 55. 
This had negative consequences for younger, mobile and self-employed people, for whom retirement annuities are illiquid and inflexible as an investment vehicle. As a result, they use other “after-tax” savings mechanisms such as endowments and unit trusts, and forfeit the favourable tax treatment within retirement annuities.

The legislative changes will allow withdrawal from retirement annuities in a similar manner to withdrawing membership from any other retirement fund. 
Retirement annuities are again becoming an attractive method to boost retirement capital and will benefit self-employed people.

At present, employees moving to a new company who wish to preserve their retirement capital, have three main options: transferring the capital to the new company’s fund; transferring the retirement capital to a retirement annuity; or transferring retirement capital to a “participating” preservation fund, which allows them a one-off draw .

In terms of the new legislation, you may be able to transfer your savings to a preservation fund of your choice; transfer between preservation funds; combine preservation funds and retire at any time from the preservation fund after reaching the age of 55.

These major advances in flexible, tax-effective wealth accumulation solutions have allowed investors rapidly to grow their investment portfolios. 
Globally, retirement provision is becoming more and more of an individual responsibility. 

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