Update: Retirement Fund Reform

Geraldine Macpherson

Legal marketing specialist Gauteng

NT’s technical discussion papers

Compulsory preservation

Compulsory preservation

• One of the 2 biggest culprits for the lack of retirement funding for so many has been identified as lack of preservation of benefits

• The other one is the lack of annuitisation of provident fund benefits

Basic premises

• Accrued and vested rights will be protected:

• All funds held in retirement funds at the date of implementation will be subject to the “old” rules when it comes to access and withdrawals

• Only new funds and new contributions will be subject to the new rules.

Basic premises

• Retirement funds must “nudge” members into preservation:

• Eg default preservation fund

• Could consider making fund membership compulsory for all employees

Basic premises

• Withdrawal mechanism on retrenchment could be extended to RAs and Preservation funds

Options under consideration:

• Full withdrawal permitted with increased tax thresholds

• Higher tax to discourage withdrawal

• 3 -5 year monitoring period

• Monitor the impact of the default position and if no change then re-visit

• Partial withdrawal only

• Eg 1/3rd

Options under consideration:

• Maximum income per month

• If unable to find employment

• Full preservation with no withdrawals

• Greater portability between funds (obligation to transfer and to accept benefits)

Provident and Pension fund alignment

Overall acknowledgment

• Many trustees lack knowledge, skill and expertise required to perform their duties

• Will introduce mandatory regular training

Enabling a better income at retirement

Enabling a better income at retirement

• PROBLEM:

• saving towards retirement is highly regulated, member’s hand is held the entire way:

• Compulsory membership, contributions collected at source, investment decisions taken by trustees, only limited access to funds

• BUT at retirement, member is thrown to the sharks and left to own devices entirely

Types of Annuities

Life Annuity (Conventional Annuity) Living Annuity

Guaranteed income for life Risk of longevity

No investment risk Investment risk

Fixed draw down Variable draw down

No ongoing advice High advice

Relatively well costed, CPI linked annuities a possible concern

High costs, layered costs

May only be sold by registered life insurance companies

Stats

Size of the Annuities market

2003 R8 billion

2011 R31 billion plus

Types of annuities sold

2003 50% Life annuities

2011 14% life annuities

Average drawdown is 7.5% plus charges = 10%

2 out 3 chance that income will drop by 30% in real terms while alive

Average drawdown is 7.5% plus charges = 10%

2 out 3 chance that income will drop by 30% in real terms while alive

Commission on a LA up to 10 x higher than life

annuityOnly 10% of

policies sold by brokers are life

annuities

NT’s challenge

• Considering ways to:

• Reduce the cost of living annuities and

• Reduce the level of financial advice required

Potential new vehicle

• Tax free vehicle based on investment collective schemes out of which retirement income can be paid› No investment choice› BUT may choose between different vehicles with different

underlying investments› May switch from one to another› Restricted drawdown› Restricted commission› Prudent investment regulations (Reg 28)

Increased assistance to retirees

• Fund to have a default retirement income product

• Member may opt out of the default

Improving tax incentives for retirement savings

Improving tax incentives for retirement savings

• Nearly R1 trillion is invested in SAs retirement market, mostly in the private sector!

• Aim is to simplify tax treatment of contributions to the different funds

• Increase rate across the board

Employer may deduct between 10% and 20% of approved remuneration of employee as a business expense. These contributions do not form part of

the employee’s taxable income!

Employer may deduct between 10% and 20% of approved remuneration of employee as a business expense. These contributions do not form part of

the employee’s taxable income!

2012 Budget proposals:

• Employer contributions to funds will be taxed as a fringe benefit in hands of employees

• Employee’s deduction iro own and employer contributions:

• 22.5% capped at R250 000

• 27.%% capped at R300 000

• Min deduction R20 000 to allow low income earners to deduct in excess of the limits

2012 Budget proposals:

• Non deductible contributions will be exempt from income tax on retirement, against lump sum or annuity

• Rollover – same as RAs

• Contributions to risk and administration costs will be included in the maximum allowable deduction

What still needs to be decided?

• Treatment of defined benefit and hybrid funds

• Exact definition of the Income Base to which the percentages and caps will apply.

Incentivising non retirement savings

Incentivising non retirement savings

• Focus is on low to medium income earners

• Current:

• Interest exemption

• BUT not visible enough and

• Restricts investment choice to interest bearing accounts

• Proposed

• Scrap interest exemption

• Tax incentivised savings vehicles

How will it work?

• Earnings and capital tax free

• Contributions made from after tax money

• Caps on contributions:

• R30 000 p/a

• R500 000 per lifetime

• If 45 -49: ¼ of lifetime limit

• If 50 -59: ½ of lifetime limit

• If over 60: max

• In one transaction period

• Savings vehicle must be registered with SARS

What will it be?

• 2 options:

Interest bearing accounts which may invest in bank deposits, Retail savings bonds or interest bearing CIS s such as money market funds

OR

Equity accounts which may invest in CIS s that hold JSE listed equities or which directly own property

Where to from here

• Broad consultation

• Feedback by the end of November

• Policy decisions to be taken

• Draft and then final legislation

• WATCH THIS SPACE!

Thank you

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