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South Africa Details Pensions, Savings Changes

by Lorys Charalambous,, Cyprus

17 March 2014

The South African National Treasury has published two papers that provide further details of proposed retirement reforms and tax free-savings products, as announced by the Minister of Finance Pravin Gordhan in his 2014 Budget last month.

The retirement reform paper confirms the Government's broad policy goals, including the implementation of an auto-enrolment or a mandatory contribution system; improving pre-retirement preservation; improving fund disclosure; and simplifying retirement savings products and making them portable between providers. Draft legislation and regulations will be subject to a formal consultation process.

From March 1, 2015, new contributions to any retirement fund will be subject to the same tax dispensation rules, and these contributions will be subject to the same annuity requirements when members retire, i.e. that no more than one-third may be taken in cash and that the rest must be taken in the form of a pension.

However, as the Gordhan announced in the 2014 Budget, there will be an increase in the tax-free lump-sum amount paid out of retirement funds, from ZAR315,000 (USD29,500) to ZAR500,000, to benefit those on lower incomes who did not benefit from deductible contributions. This proposal took effect from March 1, 2014.

Under the new system, from March 1, 2015, employer contributions to retirement funds is to classed as a fringe benefit in the hands of employees for tax purposes. However, individuals will be able to receive a tax deduction on employer and employee contributions to a pension fund, provident fund, or retirement annuity fund of up to 27.5 percent of the greater of remuneration or taxable income. For equity reasons, an annual ceiling of ZAR350,000 will apply.

The first low-income retirees from provident funds will begin to be affected by the new rules in 2020 to 2025. The transition to the new system will only be complete in about 2055, though it is hoped that members will voluntarily elect to purchase annuities with their retirement lump sums before then.

In the 2014 Budget, Gordhan also confirmed that legislation to allow for tax-exempt savings accounts will proceed this year to encourage household savings. All returns accrued and any withdrawals from the accounts will be exempt from tax.

These accounts will have an initial annual contribution limit of ZAR30,000, and a lifetime limit of ZAR500,000, to be increased regularly in line with inflation. The new accounts will be introduced by 2015, and will co-exist with the current tax-free interest income dispensation.

A revision to the proposal retains the current interest income exemptions – ZAR34,500 for individuals 65 years and over, and ZAR23,800 for individuals below 65 years – which were proposed to be abolished. However, the exemptions will not increase with inflation.

Individuals will be allowed to open up to two accounts, in which they may invest in either interest-bearing or equity instruments, or both types of investments in each account. Total contributions for the tax year may not exceed the annual limit. Unnecessary withdrawals will be discouraged by blocking the replacement of withdrawn amounts.

Institutions that have a banking or collective investment scheme licence will automatically be eligible to offer products through the tax-free savings accounts. Stockbrokers that are registered with the Financial Services Board and the Johannesburg Stock Exchange will also be eligible, provided that products offered comply with the stated principles and characteristics.

However, it has been stressed that not all market savings or investment products may be appropriate for inclusion in these accounts. Most collective investment schemes are the typical type of investment that will be included, along with bank savings accounts, fixed deposits, retail savings bonds, Real Estate Investment Trusts and insurance investment products that meet guidelines.

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 | South Africa | Finance | Institutions | tax | investment | pensions | tax incentives | law | banking | financial services | employees | retirement | equity investment | legislation | tax breaks | tax reform | regulation | legislation amendments | individual income tax | services | Africa

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