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South Africa Postpones Provident Fund Annuitization

by Lorys Charalambous,, Cyprus

22 February 2016

South Africa's National Treasury has confirmed that the requirement for provident fund members to purchase an annuity at retirement will be postponed for two years to allow for further consultation.

An amendment in the 2015 Tax Laws Amendment Act (TLAA) currently allows one-third of retirement savings to be cashed out as a lump sum, with the remaining two-thirds to be annuitized. This law already applies to all pension fund and retirement annuity fund members, but was to be extended to members of provident funds with effect from March 1, 2016.

An urgent tax amendment bill will now be tabled by the Government to propose postponement of the annuitization requirement for provident funds until March 1, 2018. Provident fund members will therefore not be required to annuitize contributions to their funds that were made before that date.

However, the National Treasury emphasized that all other provisions relating to retirement in the 2015 TLAA (and the 2013 and 2014 TLAAs) will still come into force on March 1, 2016. The pension fund tax harmonization reforms will continue to be implemented as scheduled on that date.

Therefore, from March 1, 2016, the tax deduction for contributions to all retirement funds (including provident funds) will increase to 27.5 percent of the greater of taxable income or remuneration, up to a cap of ZAR350,000 (USD22,725) per year; and the minimum threshold required for the annuitization for pension and retirement annuity funds will still be increased from ZAR75,000 to ZAR247,500.

The National Treasury commented that "there is broad consensus that the harmonization and capping of tax deductions will make the tax system simpler, more equitable, and progressive. It will limit the tax deduction to very-high-income earners and allow lower- and middle-income earners a bigger tax deduction."

It added that a "core principle of the tax legislation [is that a] deduction of contributions made to retirement savings is provided on the condition that there is annuitization. … Government remains of the view that the principle of annuitization is in the best interest of all members of retirement funds as it can alleviate old-age poverty."

In the case of provident funds, even though the requirement to annuitize is to be postponed until 2018, the tax deduction will still be allowed while the consultation is undertaken. If no agreement is reached in the next two years regarding annuitization, this tax benefit to provident fund members will be reviewed to achieve fairness between all retirement funds, the Treasury said.

TAGS: individuals | South Africa | tax | investment | pensions | tax incentives | law | retirement | investment funds | legislation | tax breaks | legislation amendments | Africa | Tax

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