Proposed retirement fund tax changes – here’s what you need to know

By Denver Keswell

National Treasury (treasury) has recently released the Taxation Laws Amendment Bill 2021 (TLAB) which set out their proposals for tax legislation changes. There are a number of proposals that will affect retirement fund members and we have highlighted a few of those proposals below:

Allowing retirement fund members to use retirement benefit to purchase various annuities on retirement:

Treasury proposes changing the definition of “retirement annuity fund”, “pension fund”, “pension preservation fund”, “provident fund” and “provident preservation fund” in the Income Tax Act (the act) to allow for various types of annuities. Currently the annuity can be provided by the retirement fund in one of three ways: 

  • paid directly by the retirement fund to the retiring member;
  • purchased from a South African registered insurer in the name of the fund; or
  • purchased by the retirement fund from a South African registered insurer in the name of the life of the retiring member.

The definition in the act talks to allowing the purchase of an annuity which has caused much confusion as to whether a retiring member can purchase multiple and various annuities.

The proposal in TLAB is to allow a retiring member to purchase a combination of the above types of annuities including a combination of a living annuity and a guaranteed annuity (income for life). The only proviso to purchasing multiple annuities is that the retirement benefit used to purchase an annuity must be more than R165 000. Should this proposal go through uncontested it will become effective 1 March 2022.

Retirement Funds and Emigration:

In our previous Quarterly Newsletter we indicated that treasury was looking to once again amend legislation dealing with tax and retirement fund members who leave South Africa. This time around, the intention is to ensure that South Africa does not forfeit any tax when a retirement fund member is no longer a tax resident. Remember that members are entitled to reduce their taxable income every contributing year with a contribution tax deduction and Treasury wants to ensure that there is some form of “tax neutrality” when a member is no longer tax resident.

The proposal from treasury is to change the tax legislation to ensure that when an individual ceases to be a South African tax resident, his/her retirement fund benefit will be subject to tax in South Africa in terms of either the retirement or withdrawal “lump sum” table. The member will be deemed to have retired or to have withdrawn their retirement benefit the day before they ceased to be a South African tax resident. The onus of providing SARS with a valuation on that date as well as notification that they have ceased to be tax resident will fall on the member.

Tax payable will only be due when the member receives their retirement benefit via a withdrawal or retirement lump sum. Tax will be applicable as per relevant lump sum table and the member will receive a tax credit for any “deemed tax” levied the day before they ceased to be tax resident. The intention is for the amendments to become effective 1 March 2022.

Taxation of annuities

When an annuitant receives an annuity payment (compulsory annuities at retirement and voluntary purchase annuities) the entity paying the annuity (retirement fund or life assurer) applies the PAYE income tax table. The problem identified with this method is that if the same annuitant had multiple sources of income, they would be under taxed by the paying entity which would result in a potentially high tax pay in on assessment. Many annuitants are not in a financial position to pay in tax that they have not accounted for. In order to remedy this anomaly, treasury intends to introduce legislation that will account for all sources of annuity income received by the taxpayer. The paying entity will apply the income tax table at on-boarding of the annuitant and will then apply a fixed rate of tax as provided for by SARS in subsequent tax years.

Once again, the intention is for this proposal to become effective 1 March 2022.

Retirement fund transfers for members older than 55

Transfers between retirement fund are taxable events however current legislation allows for certain tax-free transfers. This exemption does not apply to those members who have already reached their “normal retirement age” however have not chosen to retire from their retirement fund. Treasury intends to amend legislation to allow for tax-free transfers for those members who have already reached their “normal retirement age” in terms of their fund rules and have not yet chose to retire into a “similar fund” The effective date proposed is also 1 March 2022.