T-Day: Worker Concerns
By Lerato Mogopudi, Senior Consultant, Simeka Consultants and Actuaries
Quarter 2: 2014
We have received a number of reports of member dissatisfaction with the T-Day legislation. To assist trustees and employers to assess the concerns we unpack the T-Day legislation and the Implications for members.
The tax deductibility in respect of pension, provident and retirement annuity (RA) funds will be harmonised. Most members will be better off and will enjoy a greater level of deduction – see the table.
|Employer Cumulative||Member||Old total deduction||New member deduction|
|Retirement annuity fund||–||15%||15%||27.5%|
The maximum deductible contribution is R350 000 p.a., which means it will affect members who contribute 27.5% and earn in excess of R1.273 million p.a.
Employer contributions will continue to be payable in terms of the employment contract and the rules of the fund. They will also continue to be deductible. However, in order to improve the tax monitoring system, contributions must in future be shown as taxable benefits in the hands of the members. The fact that employer contributions will be taxed in the hands of the members can have an emotive quality but the reality is that it will be more than offset by the enhanced new employee contributions.
Integration of provident funds
The provident fund benefit structure, especially the aspect that allows members to take their full retirement benefits in cash, will be phased out. All new contributions, on or after 1 March 2015, will be treated in the same way as pension funds. This means that at retirement a maximum of one-third of the new contributions, and growth thereon, can be taken in cash and the two-thirds that are left must be annuitised.
All existing entitlements to a lump sum on T-Day will be preserved. Members will continue to be able to take these amounts, as well as the growth thereon, in a cash lump sum at retirement. Provident fund members aged 55 and older on T-day and who remain in the same fund will not be affected by the new requirements and will be allowed to continue to take all future benefits by way of a lump sum. Retirement benefits below R150 000 (previously R75 000) can be taken in cash. For a worker with an income of R10 000 per month and a gross contribution of 15% it will take around 5 years before new contributions will exceed R150 000 and before members will be compelled to purchase an annuity in respect of two- thirds of their retirement benefit.
Preservation and P-Day
Even after T-Day members will still be able to take their entire withdrawal benefit in cash (upon retrenchment, resignation or notice) whether they are in a pension or a provident fund. National Treasury proposes that on P-Day (the date has not been set yet as P-day is still being discussed at NEDLAC) members may only take one tenth of their withdrawal benefits per annum.
National Treasury is also proposing measures that will compel all employees in South Africa to belong to and contribute to a retirement fund.
Could a member do better if they were to try and invest their monies themselves?
The short answer is no. Firstly, retirement funds are virtual tax havens. You will not find a more tax-efficient saving vehicle in South Africa. Secondly, retirement funds are wholesale operations that enjoy lower institutional prices and economies of scale. National Treasury is proposing a whole range of measures to reduce the costs even further. Thirdly, retirement funds, as a form of contractual saving, are super convenient and efficient. Membership and contributions to occupational funds are arranged, investments are made and benefits will be paid whether the member pays any attention to it or not. Lastly, the proposed default benefits that will in future be negotiated by the trustees, should be more tax efficient, cost effective and convenient than anything members could design and implement themselves.
Is there reason for concern? Workers are unlikely to be prejudiced in the short term. Those who preferred a provident fund type benefit structure will however be compelled to annuitise two thirds of their retirement benefits in future.