There are now better reasons to save for retirement

Pravin Godhan gives the 2013 budget statement in Parliament (David Harrison, M&G)

Pravin Godhan gives the 2013 budget statement in Parliament (David Harrison, M&G)

It's clear from a 12-page document released for discussion alongside the Budget Review that the policy is intended to be a carrot rather than a stick for a nation notoriously bad at saving. Figures from the treasury show that only 10% of South Africans can maintain their preretirement lifestyle and level of consumption.

The discussion document will form the basis of draft regulation that will be introduced this year.

Speaking in Cape Town on Wednesday, Gordhan said that when staff members resign their companies' retirement funds must encourage them to move their money to preservation funds.

"Retirement funds will be required to guide their members through the process of converting savings into regular income after retirement, and to choose or establish default annuity products that meet appropriate principles and standards," he said.

Competition will also be promoted by allowing providers other than life officers to sell living annuities.

Gordhan envisages that tax regulations regarding pensions, provident funds and retirement annuities will be harmonised to make them easier to understand. Planned changes include giving provident or pension fund contributors a 27.5% deduction on their remuneration or tax (whichever is the larger) on their contribution, capped at R350 000 a year.

At present, a retirement annuity allows a tax deduction of up to 15% of an employee's remuneration or taxable income.

The discussion paper proposes that future contributions made to provident funds after an agreed date will be subject to the same annualisation requirements applicable to retirement annuity and pension funds.

In another proposed change, provident fund members older than 55 at the time of implementation of the new regime will be able to withdraw a lump sum and benefit from the tax deductions.
Those under 55 will be able to take out their existing contributions to the provident fund as a lump sum, but will get deductions on contributions made after the policy is implemented.

This proposal, it is hoped, will significantly reduce the complexity of the retirement system.

"Governance reforms of retirement funds will also be implemented, with measures in place to ensure trustees of retirement funds are trained once they have been appointed," Gordhan said. He plans to hold a conference for trustees later this year to promote and encourage further training on and familiarity with retirement tax.

According to the discussion document, research found that most individuals "were left to the retail market by their retirement funds once they had retired. Here they face a complex choice between conventional annuities, which guarantee individuals income for as long as they are alive, and living annuities, in which individuals bear the risk of outliving their assets, as well as the risk that their annuities will perform badly".

The discussion document says that at present most retirees are choosing living annuities.

On the issue of non-retirement saving, the discussion document says the government intends to proceed with the implementation of tax-preferred savings and investment accounts. All returns accrued in these accounts and any withdrawals should be exempt from tax. The accounts, which are to be introduced by 2015, would have an annual contribution limit of R30 000 and a lifetime limit of R500 000, to be increased in line with inflation.

But Vedika Andhee, director for tax at Ernest & Young, questioned whether the average South African would benefit from the reforms, because they either could not afford to contribute or could not retain or save the money they placed into retirement funds. Andhee said, according to the income and expenditure survey for 2010-2011 released in November 2012 by Statistics South Africa, the average household expenditure increased 69.5% in a five-year period.

Retrenched individuals were also likely to live off the money. "Perhaps [given present economic circumstances] the minister should have considered adding further tax relief for individuals who … are retrenched."

The public have until May 31 this year to respond to the discussion document, which is available on the treasury website.

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