If you’re diligently putting money away for your retirement in the form of a pension, provident fund or retirement annuity, you may be curious – perhaps even a touch concerned – about the changes SARS has made to the retirement fund tax laws, which come into effect on 1 March 2016.
If you missed the news, here's a quick overview.
SARS have changed how contributions to retirement funds are treated from a tax perspective, as well as how your funds are managed when you retire. Previously, the different types of retirement funds, i.e. pension funds, provident funds and retirement annuities each had their own set of tax deductions and limitations. Rather confusing indeed!
Under the new regulation, all types of retirements funds are treated the same for tax purposes. They've also added rules that determine how you need to manage your funds at retirement. Essentially what they’re trying to do is encourage us all to save more and preserve our funds for longer into our golden years.
I'm sure you're interested in the nitty-gritty details and numbers, aren't you?
Let's dive in.
Tax on Employee Contributions to Retirement Funds
Before these changes, contributions to a provident fund had no tax benefit, and pension funds and retirement annuities each had their own set of complex deductions and limits.
As of 1 March 2016 this changes.
Irrespective of whether you have a pension, provident or retirement annuity (RA) fund – or even a combination of these - you will qualify for a tax deduction of up to 27,5% of your taxable income (to a maximum of R350,000 per year). This limit applies to the total of contributions you made to all funds for the year. This means you'll save a significant amount on your annual tax bill - a great reason to consider starting to save for your retirement now, if you haven’t already.
For example, let’s say your taxable income (which includes salary, rental income, freelance income , etc.) is R10,000 per month and you contribute R1,000 to an RA and R600 to a provident fund each month.
This means your total retirement contributions for the year are:
(R1,000 x 12) + (R600 x 12) = R12,000 + R7,200 = R19,200
Your annual taxable income, before deductions, is R120,000 (R10,000 x 12 months). This means you can claim a tax deduction of up to R33,000 (27,5% of R120,000). You’re limited to the total of your actual contributions though, so in this case the amount of R19,200 can be deducted from your taxable income for the year.
Let’s do the maths.
Taxable income = R120,000 Retirement fund deduction allowed = R19,200 R120,000 – R19,200 = R100,800
So your ‘new’ annual taxable income, after deductions, is R100,800. This will be the amount used to calculate your tax and not R120,000.
Under the old laws, before 1 March 2016, the only amount allowed to be deducted would’ve been the RA contribution of R12,000. Under the new rules, you’re getting an additional R7,200 in tax deductions.
What About Employer Contributions to Retirement Funds?
Many employers structure salaries in such a way that they make contributions on your behalf to a pension, provident or RA Fund automatically each month. This is still allowed come 1 March 2016 but your payslip may look a little different. From then, these contributions will be included as part of your income, but it will be taxed as a fringe benefit.
So yes, they’ll be subject to tax, but because these contributions will be deemed to have been made by the employee (that’s you), you’ll be able to claim your retirement fund tax deduction come filing season, if you file your tax return correctly .
Why did SARS do this?
Essentially they’re aiming to make contribution deductions fairer for all taxpayers and discourage high-income taxpayers from structuring a high percentage (e.g. 30%) of their salary package as an employer contribution to a provident fund, cutting their tax obligation.
What About Withdrawing Retirement Funds?
(24 February Update: The following changes have been delayed until 1 March 2018.)
The new SARS retirement fund regulation addresses how provident fund payouts are handled at the point of retirement. How this affects you, and your funds, depends on how old you are on 1 March 2016.
Provident Fund Payout at Retirement
If you’re 55 years or younger on 1 March 2016
The government want to encourage people - most especially the younger generation - to save adequately for their retirement and not have to rely on measly grants for financial aid in their later years. To support this, when retiring, you’re only allowed to withdraw up to one-third of your total balance of your provident fund as a lump sum payment, and the rest must be used to purchase a monthly annuity, such as a pension fund.
Wait! Don’t panic just yet. There are a few stipulations here.
Firstly, the new rules only apply to contributions made after 1 March 2016. In other words your total balance in your Provident Fund on 29 February 2016 will be available to you to withdraw in full at retirement, if you so wish. Only the amount accumulated from 1 March 2016 to your retirement date will be subject to the new legislation.
Secondly, bear in mind that if your fund (pension, provident or RA) is worth R247,500 or less (based on contributions and earnings made after 1 March 2016) at retirement date, you’ll be able to withdraw the full balance and you’re not obliged to purchase the annuity. Previously this amount was R75,000 for pension and RA funds.
If you’re 55 years or older on 1 March 2016
You’re exempt from these new regulations and you can access your full provident fund at retirement, even those contributions made after 1 March 2016. This does, however, only apply if you remain with the same provident fund.
Cashing In Your Retirement Fund Prior to Retirement
If you resign from your job, for example, you can still decide to cash in (withdraw) your full balance of your retirement fund savings, but you’re going to be taxed on the full amount. Use our handy Lump Sum Tax Calculator to work out exactly how much the tax man will want.
Benefits of the Retirement Fund Tax Amendment
Simplifies tax treatment of retirement funds by treating them all the same way for tax purposes. The different treatment under the old tax laws was very confusing!
It provides a great opportunity for individuals to increase contributions to their retirement funds and obtain a bigger tax saving in the process.
Employees contributing to a provident fund can now also enjoy a tax saving each month and therefore potentially see an increase in take-home pay!
It extends post-retirement income for Provident Fund members by making it compulsory for them to purchase an annuity at retirement (provided their fund is above R247,500).