The impact of retirement reform coming into effect on 1 March 2016 – Summary

Category: General
Date: 30 May 2016

Tuesday 26 January 2016

Good Day All,

Most companies are back up and running, getting down to serious business. For those following our facebook page, you will have noticed numerous and varied articles and announcements. If you haven’t liked our page yet, go to : Kwa-Zulu Natal Engineering Industries Association to get updates and interesting articles.

There is a real magic in enthusiasm. It spells the difference between mediocrity and accomplishment.

–         Unknown

If you are battling to find it, ctrl+click on this link: https://www.facebook.com/kzneia
We have posted a number of articles on the Retirement Tax Reforms as this is currently a hot topic with Labour. There is also an invitation to join a DCCI Breakfast Workshop on the current salary increase trends, to take place on 18 February. Don’t forget to put the dates of our forthcoming events into your diaries (see the list below).

Call for Comment: Proposal for a new NSDS and SETA landscape

There is still time to submit your opinions and/or comment on the proposed changes. We are working on our response in conjunction with the DCCI and will also support submissions made by SEIFSA.

If you would like to submit comment or participate in the process please contact Kylie Griffin on 082 563 0574 or email: kzneia@iafrica.com

Retirement Reforms

Apologies, the date of the MIBFA Board of Trustees meeting mentioned in the last Brief should have read: Tuesday 23 February 2016. We have received numerous queries and will attempt to gain clarity on the impact of the new legislation. Should you have specific questions or queries, please make contact on 082 563 0574 or email: kzneia@iafrica.com

There have been many articles published; please go to our facebook page as we have posted numerous articles in the past few days. In general the articles report a total opposition to this legislation by labour. Companies may have some employees who want to resign in order to claim the money in their funds. We recommend that employers educate employees on the implications of their actions and why resignation is not the answer. There have also been numerous reports of calls for industrial and/or mass action. NUMSA submitted a Section 77 application for protest action to NEDLAC for consideration. We will keep you informed of developments in this regard.

We have added an interesting article posted by the DCCI to the bottom of this newsletter for your reading. MIBFA is currently finalizing communication on the impact of this legislation on the industry funds, which we will include in the next newsletter. Contact us should you need any assistance.

SEIFSA Strategy Session

The SEIFSA Strategy Session took place Monday 18 January. Henk Duys and Kylie Griffin attended on behalf of KZNEIA members. The programme was exhaustive. The Exec will discuss the implications for KZNEIA and the new developments for the Association in 2016. For a full update, please attend the General meeting – see the schedule below.

The presentations given appeared to have been well researched and the information shared provided gave insight into the current affairs at SEIFSA and in the industry. The presentations provided further insight into the role of SEIFSA and the future of the industry. Proposals from various association representatives were debated.

KZNEIA has already embarked on a strategy to reclaim its independence, and expand its influence beyond the borders of KZN.  We are determined to offer improve services and benefits to our members.  With the birth of the NEW KZNEAIA (KWA-ZULU NATAL ENGINEERING AND ASSOCIATED INDUSTRIES ASSOCIATION) in 2016 we wish to emphasize the importance of member company representatives attending and participating in meetings to ensure that our business strategies are correctly aligned with your needs.

NERSA Public Hearings iro Eskom’s Application

NERSA is currently conducting nation-wide public hearings in respect of Eskom’s Application for additional income to cover historical deficits. KZNEIA has once again represented its members by being actively involved with local submissions relating to the NERSA public hearings iro Eskom’s application. SEIFA has also made a submission on behalf of our industry at a National level.

In principle the application has been opposed and we now await the outcome of the final hearings and ultimately the NERSA decision.

Should members wish to have a copy of the submissions made, please contact us via email: kzneia@iafrica.com

Coming up……
Date Time Event Venue Comment
Monday

01 Feb

12:00 SEIFSA Board and Council Meeting CCJ Ian Delport to attend
Wednesday

03 Feb

07:30

10:00

Employer Caucus followed by MEIBC Regional Council MEIBC Durban KZNEIA MEIBC delegates to attend
Thursday

04 Feb

10:00 Joint Employer party Collective Bargaining Forum MEIBC National Office Kylie Griffin to attend obo KZNEIA
Wednesday

10 Feb

07:30 KZNEIA Executive Duys Engineering Executive Team
Thursday

11 Feb

15:00 KZNEIA Association Meeting Augusta, Hillcrest All members to attend
Tuesday

23 Feb

09:00 MIBFA Board of Trustees meeting Southern Sun ORT Kylie Griffin to attend obo KZNEIA
Tuesday

23 Feb

10:00 MEIBC FACOM MEIBC National Office TBA
Wednesday 24 Feb 10:00 MEIBC STANCO MEIBC National Office Kylie Griffin to attend obo KZNEIA

 

Note: Feedback from all events will be given to members at the meeting on Thursday 11 February 2016 as well as an update on developments with regards KZNEIA and the move to greater independence and autonomy.

Members are urged to make an effort to be at this meeting in order to engage and ensure the Association if working for you.

The impact of retirement reform coming into effect on

1 March 2016 – Summary

The Taxation Laws Amendment Act, 2015 has passed some of Government’s retirement reform proposals into law. The new rules are designed to harmonise the tax treatment and annuitisation requirements for all types of retirement funds (ie pension, provident and retirement annuity funds). The new rules will take effect on 1 March 2016.

In summary, from 1 March 2016, the deduction cap for retirement fund contributions increases to 27.5% of the greater of remuneration or taxable income. This rate applies to the aggregate of contributions made to an individual’s pension, provident and retirement annuity funds. Presently, different contribution caps and deduction bases apply to the three types of funds.

The annual deduction cap is R350 000 (including the cost of risk benefits). Individuals who contribute more in any one year can carry forward any unclaimed amount and deduct these from tax in subsequent years, subject to the deduction limits in those years. Any unclaimed contributions are returned untaxed at withdrawal or retirement.

Only the employee may claim contributions (both in respect of the employer and the employee contributions). The employee’s PAYE deduction must be adjusted to reflect these contributions. If the employer makes the contribution, this must be neutralized by way of a fringe benefits tax charge levied on the employee.

Further, to secure the longevity of savings, provident fund members must, from 1 March 2016, use two-thirds of their fund benefit to purchase an annuity. The new rules will only apply to contributions made after 1 March 2016 and on the subsequent return earned on those contributions. So-called vested rights (the provident fund balance on 28 February 2016 and subsequent returns thereon) remain under the old rules, and may be claimed as a lump sum at retirement.

Provident fund members who are 55 or older on 1 March 2016 are exempt from these provisions, as are retirement balances below R247 500 (previously R75 000).

How will legislative changes affect employees?

Tables 1, 2 and 3 compare the current and revised rules for pension, provident and retirement annuity fund members respectively. Below, we highlight some general and specific issues.

General. Both pension and provident members may be affected the newly-introduced annual contribution cap of R350 000. This cap includes the premiums paid in respect cover attached to the fund (in essence Group Life and Disability income cover). Members who currently pay more than R350 000 (by way of their and/or their employer’s contribution) will, from 1 March 2016 pay tax on the contributions above the cap and will accordingly see a reduction in their take-home pay. Members may benefit from the new definition of the base against which the deduction is measured. This base is now the higher of “gross remuneration or taxable income”. The base was previously defined as “approved remuneration” for pension funds and “pensionable income” for provident funds (as defined by the employer).

The reference to “taxable income” effectively enables pension and provident fund members who receive outside income (for example derived from rental income, alternate employment or investments) to claim a pension fund deduction against such income. Previously such “outside” income could only be used to claim deductions on retirement annuity contributions. Members who wish to top up their retirement fund savings will no longer need to take out a separate retirement annuity.

Pension fund members. Pension fund members are least affected by these changes as the current pension fund model is effectively becoming the “standard” retirement fund model. One notably change is that the minimum fund balance requiring annuitisation will increase from R75 000 to R247 500, and that from 1 March 2016, they will also be able to transfer the pension fund proceeds tax-free to a provident or provident preservation fund.

Provident fund members. Provident fund members are most affected by these changes as they will effectively switch to the pension fund model (requiring the purchase of a compulsory annuity at retirement with two-thirds of their fund balance). However, their so-called “vested rights” will remain under the old rules.

In return, they will be able to claim a larger tax deduction (in percentage terms) on their contributions (effective increase from 20% of pensionable income to 27.5% of gross remuneration or taxable income). Provident fund members who currently contribute to their fund will see an increase in their take-home pay as they will now receive a tax deduction on their contribution.

Retirement annuity funds. Retirement annuity investors are impacted positively by these changes. They will now receive the same tax deductions as other savers, and they will also be able to claim retirement annuity deductions against pensionable or retirement-funding income (within the prescribed limits).

In addition, the minimum fund balance requiring annuitisation will increase from R75 000 to R247 500.

Table1: Impact of 1 March 2016 changes on pension fund members

1

Table 2: Impact of 1 March 2016 changes on Provident fund members

2

Table 3: Impact of 1 March 2016 changes on retirement annuity fund members

3

How will legislative changes affect employers?
Most provident funds currently receive employer contributions, which are structured as a salary sacrifice and based on “pensionable income”. This effectively diminishes the employee’s “gross remuneration”. To maximise the permitted tax deduction from 1 March 2016, employers should rescind their employees’ “salary sacrifice” (add it back to their salary), and have them contribute to the provident fund in their own name. This will increase their tax deduction, and, for HR, avoid the fringe benefits tax administration related to the employer contribution.

If employers choose to restructure the scheme to only have employee contributions, the Special Rules will have to be amended accordingly. Employers who wish to do so should request the amendments as soon as possible, to avoid last-minute bottlenecks.

Employers should also be aware that the contribution cap includes administration costs and risk premiums paid out of these contributions. If employers wish to maximise their employees’ allocation to retirement savings, they can consider paying the fund administration fees separately and/or moving to ‘unapproved’ risk benefits, which are not attached to the fund, and which are not paid out of contribution.

If the employer’s contribution does includes risk premiums for an unapproved scheme (group life or income disability), the employer must levy a fringe benefits tax on these premiums and ensure that employees do not claim that part of the contribution as a tax deduction.

Article Link: https://www.10x.co.za/publications/impact-of-the-retirement-reform-…