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South Africa Consults On Retirement Savings Incentives

by Robert Lee,, London

15 May 2012

Following the Minister of Finance Pravin Gordhan’s announcement in his 2012 Budget in February that the South African government is looking to provide incentives for savings and the reform of the retirement industry, the National Treasury has now published an overview consultation paper.

The government’s objective is to increase the financial security of all citizens, by way of wide-ranging proposals to reform the country’s social security system, supported by a mandatory statutory fund that provides pension, life insurance and disability benefits. Additional savings in approved retirement funds for those earning above a specified threshold will also be encouraged.

It is said in the paper that the need for such reforms is evident, as most South Africans do not save adequately for retirement and only about half of the country’s workers belong to a retirement fund. While South Africa’s retirement system is successful for employed individuals earning above the income tax threshold, more than half of the formally employed workforce falls below this level, and their degree of retirement coverage depends on the industry in which they work.

To simplify the retirement system, the government now proposes a uniform retirement contribution model, under which all contributions to retirement funds – including annuities, pension and provident funds – and all benefits from those funds will be subject to the same tax treatment.

Employer contributions to all types of funds will be included in an employee’s remuneration as a fringe benefit, but individuals will be permitted a deduction up to 22.5% of their income if they are under 45 and 27.5% if they are 45 and above. This will apply to both employer and employee contributions.

To cater for the self-employed and partially self-employed, and to ease administration, the income base upon which this deduction is calculated will be changed to the greater of remuneration and taxable income.

In addition, to improve equity in the tax system and to enable lower-income individuals and those with variable incomes to contribute more, it is also proposed that the maximum permitted deduction will be ZAR250,000 (USD30,500), or ZAR300,000 for those of 45 and above, regardless of income.

A special arrangement is to be made for defined benefit funds that still exist, including the Government Employees Pension Fund, to prevent excess contributions regarding current fund surpluses or deficits, or complications caused by ageing schemes, having negative tax consequences for current members.

It is said that all of these changes are unlikely to affect the tax liabilities of the vast majority of taxpayers; by increasing pension contributions, such liabilities could even be reduced.

However, given that retirement savings are part of household savings, any changes to the regulation of retirement funds must take into account the effect on the savings, and proposals to enhance short- and medium-term savings are also under consideration.

The current regulatory framework allows individuals to use their retirement assets to fill short- and medium-term consumption-smoothing needs. Low rates of preservation indicate that this function is important for many people, but, as the preservation of retirement funds is phased in under the new system and such funds will no longer be available until retirement, the government is also considering the introduction of a tax-preferred savings vehicle to encourage individuals to save for short- and medium-term needs without relying on their retirement funds.

Individuals would be able to save up to ZAR30,000 per year into this vehicle, with a lifetime limit of ZAR500,000. Holdings in the account will be exempt from income and capital gains taxes, and a broad variety of assets will be permitted, including bank deposits, shares, retail bonds and collective investment schemes. Changes to the existing tax-free thresholds on interest income are to be considered as part of this reform, and will be phased in to ensure that existing savers are not prejudiced.

That account would raise the after-tax rate of return on accessible savings, and it is hoped that this will boost the overall savings level, especially for middle-income households.

Over the course of 2012, the National Treasury will release a series of technical discussion papers elaborating on these matters. A separate process is under way to improve financial sector regulation and prudential supervision, and market conduct supervision, to make cost structures more transparent and protect policyholders from unfair practices and charges.

Comments on the overview document can be submitted by July 31, 2012.

A comprehensive report in our Intelligence Report series titled "The Lowtax International Pensions Report" which has an in depth view on The Mechanics of Pensions Provision, 'High-Tax' Country Pension Regimes and 'Lowtax' Jurisdictions In Which To Locate Pensions Savings, is available in the Lowtax Library at and a description of the report can be seen at
TAGS: individuals | capital gains tax (CGT) | South Africa | tax | investment | pensions | tax incentives | financial services | retirement | investment funds | tax thresholds | regulation | individual income tax | services | Africa

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