There have been many changes recently to the taxation of both retirement funds and living annuities (income post-retirement), with further changes set to commence on the 1st of March 2015.
In the detail below we take a look at these changes and highlight the important information you need to be aware of.
RETIREMENT FUNDS
Deductions
Current position
The greater of:
- 15% of non-retirement funding income
- R3500 less allowable pension fund contribution
- R1750
What is non-retirement funding income?
The balance of income not included in the calculations of Pension / Provident contributions. If you do not belong to a Pension or Provident fund then your total income is non-retirement funding income.
Position from 1 March 2015
- Deductions for contributions to retirement annuities, pension funds & provident funds are to be combined.
- A deduction of up to 27.5% of the greater of remuneration or taxable income will be allowed.
- This is capped at R350 000 per annum.
- Excess contributions can be carried over to the following year, subject to the limit of R350 000 per annum.
- Employer contributions will be taxed as a fringe benefit in the hands of the employee (member).
Taxation of Lump sum benefit at Retirement
Current position
- Any amounts that have not previously been deducted (disallowed contributions) will be deducted from the lump sum payments should the member elect to take a lump sum.
- Aggregation will apply where previous lump sums were taken as per the table below:
Annuitisation of Retirement Benefits
Current position
- RA and pension fund members must invest 2/3 of their retirement benefit in a pension providing vehicle.
- Provident fund members are not required to annuitise any portion of their retirement benefit.
- If the total value of a fund interest at retirement does not exceed R75 000, the member may receive the entire retirement interest in the form of a lump sum (applies cumulatively).
Access to a lump sum prior to normal retirement at age 55:
- Investment value in a retirement fund below R7000 (RA only).
- Formal Emigration (RA only).
- Early retirement.
Position from 1 March 2015
- Mandatory annuitisation for Provident fund members – required to annuitise at least 2/3 of their benefit (aligning provident and pension funds).
- Historic vested rights will be protected i.e. balances in provident funds as at 1 March 2015 (and any subsequent growth thereon) need not be annuitised.
- If a provident fund member is older than 55 years of age as at 1 March 2015, the mandatory annuitisation requirements will not apply to contributions made (and any growth thereon) after 1 March 2015 if the member remains in the same provident fund until retirement.
- If the total value of a fund interest at retirement does not exceed R150 000, the member may receive the entire retirement interest in the form of a lump sum (applies cumulatively).
Divorce Interest and Deduction from Retirement Funds
Islamic marriages
- A deduction can now be made from the member`s retirement fund in favour of the non-member spouse.
Divorce Interest
- The prescribed rate of interest that is used to determine the pension interest awarded at divorce, in respect of retirement annuity funds, has changed as follows:
The amount of the pension interest awarded to a non-member spouse is agreed upon by the member and non-member spouse whilst they are setting up their settlement agreement, which will thereafter be made an order by the court. The amount awarded cannot exceed the pension interest value which is determined by the sum of the contributions paid from inception up to the date of divorce, plus simple interest. The simple interest rate is determined by the Minister of Justice in terms of the Prescribed Rate of Interest Act 55 of 1975.
The Minister of Justice has issued a government notice in order to change the prescribed simple interest rate from 15.5% to 9% effective from 1 August 2014.
How could this affect you?
- This will impact divorce benefit pay-outs from Retirement Annuity funds only.
- For any divorce before 1 August 2014 the rate to be applied on member contributions up to the date of divorce is 15.5%.
- For any divorce on or after 1 August 2014 the rate to be applied on member contributions up to the date of divorce is 9%.
LIVING ANNUITIES
Effective 1 March 2014, excess disallowed contributions on retirement:
- Where the full retirement benefit (3/3) is used to purchase an annuity or where the disallowed contributions exceeds the lump sum benefit taken at retirement, the excess disallowed contribution can be used to set off against tax withheld in the living annuity
- This benefit is only available to the original annuitant (i.e. does not pass on to the beneficiary of the living annuity when the annuitant passes away)
As from the 1st of March 2015, provident funds will be included in this provision.
Should you have any queries please do not hesitate to contact us.
Tel: 021 701 1161 • Fax: 021 701 1169 • Fax: 0866 149 299