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Annuitisation of provident funds to proceed on 1 March 2016

12 March 2015
– 5 Minute Read


The National Assembly recently approved the Taxation Laws Amendment Bill which confirms that from 1 March 2016 future retirement savings in provident funds will be subject to compulsory annuitisation (as pension funds savings already are), but importantly also confirms that this will not interfere with members’ rights in relation to savings up until that date.

According to David Geral, partner at Bowman Gilfillan Africa Group specialising in pensions law, funds and administrators have already done much work in anticipation of these changes, originally planned to take effect in 1 March 2015.

However, with the implementation date now just three months away, there is a lot that pension and provident funds need to do to get their administration systems ready. An awareness campaign, communicating the content and implications of the changes is also important. It is critical that funds do as much as they can to allay misperceptions and fears among members.  The vested rights provisions and the increased minimum amounts to trigger annuitisation, mean that many members are unlikely to be affected by the changes in the short term.

“The originally proposed commencement date was deferred mainly due to labour concerns and sporadic actions, and there is good reason to expect some organised resistance to implementation in 2016 as well,” says Geral.

A summary of how the proposals have progressed and developed from 2013 to the current amendments – confirmed on 26 November 2015 – and their implications is as follows:

In terms of current legislation, there are substantial differences between pension, provident and retirement annuity funds (collectively referred to as retirement funds):

Pension funds and retirement annuity funds are bound by mandatory ‘annuitisation’ which requires a member to devote at least two-thirds of his or her benefit upon retirement to buying an annuity with one-third available to be taken as a lump sum. There is currently no mandatory minimum annuitisation for provident fund members, who can take their full retirement benefit as a lump sum.

Different rules apply regarding the deductibility of employer and employee contributions to pension, provident and retirement annuity funds. For example, employee contributions to a provident fund do not currently qualify for deduction.

Aneria Bouwer, partner at Bowman Gilfillan Africa Group specialising in tax law, explains that in 2013, Treasury proposed amendments to the tax legislation governing retirement funds to improve retirement tax incentives and to harmonise and simplify the taxation of retirement contributions and benefits.  The proposals, which have now been approved by the National Assembly, include:

Replacing the different rules regarding the deductibility of employer and employee contributions to retirement funds with one set of rules governing contributions to the different types of funds.  All employer contributions to retirement funds will become taxable fringe benefits, but the employee will effectively be able to claim a deduction in respect of member and employer contributions to all retirement funds, provided that the deduction may not exceed the lesser of 27.5% of taxable income/ remuneration, or ZAR 350 000.

Introducing minimum compulsory annuitisation in provident funds:

The annuitisation will only apply in respect of future contributions (savings) made from 1 March 2016.

Members who are 55 years or older at the time that the annuitisation rules are introduced are exempted from the new rule.

Where the amount saved from 1 March 2016 onward does not exceed ZAR 75 000 at the time it becomes available, no portion needs to be annuitised.

Since implementation was delayed by one year to allow for further consultations between Government and the National Economic Development and Labour Council, and the consultation process had not yet been concluded as at the end of October, certain stakeholders have called for the further delay of the implementation of the proposed reforms beyond 1 March 2016.

The Bill that has been approved by the National Assembly still needs to be approved by the National Council of Provinces and then by the President before it becomes law.

Bouwer notes that, “The changes do not only affect provident funds.  They also affect pension funds and retirement annuity funds. Previously those with a retirement benefit of less than ZAR 150 000 were not required to annuitise and could take their benefits in cash. These changes mean that the minimum amount has now increased to ZAR 247 000 so those with benefits of less than ZAR 247 000 will not be compelled to annuitise their benefits and could take the full amount as lump sums”.

Funds are not the only entities affected by these changes. Geral says that employers and their employees need to make sure they are ready for their implementation.

“The tax deductibility changes will require adjustments to payroll and may require (or suggest) alterations to a company’s benefits structure. Employers need to ensure that their HR personnel are equipped to implement the changes and are able to explain them to, and answer questions from, employees.

“Treading the fine line between assisting employees and giving them financial advice is something employers need to consider carefully, and take action on quite urgently, if they and their employees are to be ready by 1 March 2016.  Until now many employers, quite understandably, have taken a ‘wait and see’ approach.  Even though the reforms have passed the first hurdle, the fact that the legislative process is not yet complete is not helping matters,” Geral adds.