The government has chopped tax on retirement funds by half, to 9%, saying it is prepared to make further cuts to stimulate savings. However, it wants the 9% to be used as a carrot in wider discussions about reforming the life industry.
Minister of Finance Trevor Manuel told journalists at Parliament that the national Treasury would release a document proposing significant changes to retirement funding provisions. “I believe in using the carrot of further tax relief to drive discussions [with the life industry],” Manuel said.
According to Old Mutual, the government has taken R48-billion out of retirement funds by taxing income generated in individual funds.
The life industry, which has been lobbying the government to reduce the tax, will welcome the cut. This will hopefully inject a further R2,4-billion back into the pockets of retirement fund members. Manuel was at pains to send a message that this relief must be passed directly to individuals.
Rob Rusconi, the actuary who blew the whistle on pension-fund costs, said the move is welcome as the tax was introduced as a temporary measure in 1996. “Reducing the tax by half has sent a strong signal from the government as to what direction it is moving in,” he said.
Over the years debates have raged about how the 18% tax could be used to fund old-age grants and to redistribute assets from the rich to the poor.
But, Rusconi said, by drastically reducing the tax, the government has indicated that rather than use retirement funds as a redistribution vehicle it wants to encourage people to save by offering tax relief. “Using savings funds to redistribute wealth can only work in a society where savings are mandatory,” said Rusconi.
In South Africa, where retirement savings are voluntary, redistribution could work as a disincentive to save. Rusconi said the tax reduction will go some way to remedy the damage to the savings psyche of the nation after the retirement funds debacle last year.
Rusconi said the government is facing a serious fiscal problem as more and more people become dependent on social grants when they retire.
The minister confirmed that a policy paper, which will suggest an overhaul of the entire pension fund industry, will be released shortly.
In the Budget Review the government reiterated its commitment to reviewing the pension fund industry to help “re-establish consumer confidence in the sector and support the goal of South Africans making adequate provision for retirement”.
According to the Budget Review, the thrust of the reforms is to ensure that retirement savings are not depleted by excessive charges and penalties.
But, Rusconi said, it would make sense for the government to focus on how to create retirement savings for the informal sector. In South Africa, 70% of formally employed people belong to pension-fund schemes, which is on par with developed economies, however, it is the informal market that is currently left out in the cold and which will become dependent on grants. It is likely that a national savings fund aimed at low or part-time income earners will be created.
According to I-Net Bridge, the minister hinted at further cuts in the tax rate, and announced that the Treasury would soon release a document proposing “very significant changes to retirement fund provisions. These proposals must be discussed with the Life Offices’ Association, retirement fund trustees and other stakeholders.”