Finance Minister Nhlanhla Nene wants the much-awaited retirement fund tax changes to be introduced, as legislated, from March next year, and will make a proposal to trade unions about interim measures for provident fund members.
Ismail Momoniat, the deputy director-general of tax and financial sector policy, told Parliament’s standing committee on finance this week that Nene intends to propose that the changes are implemented, but that they provide for one or two years’ relief for provident fund members from the requirement that they buy a pension (annuity) on retirement with contributions made after the change.
For the period during which provident fund members will not be compelled to buy an annuity with two-thirds of their savings, they will get a tax deduction of between 10 and 15 percent, instead of the 27.5 percent of taxable income and remuneration that will be introduced from March for all retirement fund members.
The Income Tax Act was amended in 2013 to introduce a uniform tax deduction for retirement fund contributions and require all members to buy a pension. Implementation was originally set for March this year. Last year, under threat from the unions, Parliament delayed implementation until March next year, and National Treasury undertook to continue negotiations with the unions through Nedlac.
Momoniat says that after some 40 meetings with labour, the unions were still demanding a social security plan before agreeing to any retirement reforms despite the fact that the changes will be beneficial for most members.
Most retirement fund members will receive a higher tax deduction for retirement fund contributions after the change. The exception is higher income earners (over R1.27 million a year), as deductions will be limited to R350 000. Currently, provident fund members do not enjoy a tax deduction for their contributions.
Momoniat says the interim proposal for provident fund members will include a minimum amount that members will be able to deduct – probably R30 000 – and a maximum contribution of R125 000. This will ensure that they are not adversely affected by the addition of their employers’ contributions to their taxable income.
Treasury also proposes that it increases the minimum retirement savings you need before you are forced to buy an annuity as an alternative measure that will relieve lower-earning provident fund members from buying an annuity.
Momoniat told Parliament the tax changes are aimed at introducing greater equity in the way the government subsidises retirement fund contributions, as higher earners are currently able to receive higher subsidies.
Nene was keen not to delay the introduction of greater equity any longer, he said.