Treasury changes rules

2014-03-16 14:00

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Adjustments in the way tax on pension savings is implemented means some investment products will work better and some will lose their appeal

Requirements by the Treasury for the new tax preferred savings vehicle to be simple, have transparent costs and not allow for obligatory monthly deposits or surrender penalties may result in certain insurance investment products not qualifying.

For an individual saving R2?500 a month or less, products such as endowment policies may lose their appeal as they may not be as tax advantageous and if they have excessive penalties on early termination, the product will not qualify as a tax preferred savings vehicle.

This will require a review of insurance investment policies by the industry.

In a paper released on Friday, the Treasury clarified what investment products would comply with the proposed tax preferred savings vehicle, which will be launched later this year.

These include most existing unit trusts, exchange-traded funds as well as interest-bearing savings accounts such as money market, fixed deposit and the RSA Retail Savings Bonds.

But the paper specifically excludes products that have obligatory monthly deposits where excessive penalties would be imposed by stopping contributions.

In a draft version of the paper, the Treasury indicated that no penalties would be acceptable and that “most insurance investment products would not match these criteria”.

However, in the final paper, the Treasury said it would engage with the Financial Services Board in determining a reasonable early termination charge.

The latest available figures from the Association for Savings and Investment SA show consumers bought 600?868 savings policies in 2012, of which the majority were endowment policies.

The Treasury also excluded individual share purchase as the tax-free vehicle aims to “promote short- and medium-term savings, not speculation”.

Individuals will be able to save up to R30?000 a year in up to two investment accounts with a lifetime limit of R500?000. Both the annual contribution and lifetime limit will be adjusted for inflation.

In order to prevent “procrastination”, the R30?000-a-year limit cannot be rolled over – in other words, if you have not taken advantage of the annual saving, you will lose the benefit.

In order to prevent unnecessary withdrawals, individuals will not be able to replenish any funds they have taken from the investment and will still be limited to a maximum contribution of R30?000 a year.

Funds can be transferred from one tax-exempt product to another with no impact on annual or lifetime limits. The Treasury also clarified how the RSA Retail Savings Bonds top-up would operate.

Individuals can open a three-year retail bond with a minimum of R500, which they can top up with a minimum contribution of R100. Individuals can access the funds after a year.

The Treasury also made further announcements around retirement reform and has dealt with the contentious issue of compulsory preservation. Taxpayers will be allowed to make one withdrawal a year from their preservation fund, but this is limited to 10% of the capital value of the fund.

If the taxpayer does not make the withdrawal, it can be rolled over to the following year. In other words, they could access 20% of their funds the following year.

Any withdrawal would still reduce the amount one can withdraw on retirement as a lump sum.

Special recognition has been made for low-income workers, who would be allowed access to their retirement funds to meet basic needs during unemployment or financial need.

The Treasury confirmed as from March 1 2015, new contributions to any retirement fund will be subject to the same tax treatment.

That means individuals will be able to contribute the same tax-free amount to either a retirement annuity, provident or pension fund; and on retirement, the same tax rules apply – namely that one-third lump sum and two-thirds must be used to buy income.

This means members of provident funds won’t be able to withdraw all the funds on retirement.

Pension Facts

What new laws mean

»?You can save up to R2?500 a month in a tax-free savings account.

»?You will still receive a tax-free interest income of up to R23?800 if you are younger than 65 and R34?500 if you are older, although this will no longer be adjusted for inflation.

» From March 1 2015, any new contribution to a provident fund will fall under new rules and you will only be able to receive a lump sum equal to one-third of the new contributions on retirement.

»?From March 1 2015, you will be able to save up to 27% of your income in a retirement annuity, provident fund or pension fund.

»?From March 1 2015, you will only be able to access 10% of your retirement fund each year if you resign from your job.

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