The question on everyone’s mind: “Is the government trying to steal my provident fund?”
Well that could be a possibility further down the road, you never know. Who’s to say they won’t force all pension and provident funds to invest in government bonds at some point? Or introduce some or other ‘extra’ tax on the rich (The ‘rich’ being anyone with a pension or provident fund)?
But right now, it’s all a storm in a teacup, and here’s why…
As of the 1st of March 2016, our government is encouraging us to save for retirement by increasing the tax incentives for doing so.
This now happens to include those of us who belong to provident funds.
How provident funds worked in the past
The one great thing about a Provident fund was that you could take all your cash at retirement. That is no longer the case which is why all the unions are riled up.
“It’s my money. I’ve worked hard for it. When you sold me on the Provident fund I was told that I’d get all my cash when I retired. Now you’re changing the rules!”
Before retirement:
The employee was never allowed to claim a tax deduction for contributions made to the provident fund. The employer, on the other hand, could claim amounts of up to 20% (of the employee’s income) as a tax deduction.
At resignation:
The employee could take all his or her money after paying the required tax. This will not change after the 1st of March 2016.
That tax was calculated as follows during the 2015/6 tax year:
- R0 to R25,000 – No tax at all
- R25,001 to R660,000 – taxed at 18% of the amount exceeding the R25,000
- R660,001 to R990,000 – taxed at 27% of the amount exceeding R660,000 and
- R990,001 and above – taxed at 36% of the amount exceeding R990,000
At retirement:
The employee was allowed to take the full lumpsum of capital available to them. But they had to first settle the tax bill with South African Revenue Services (SARS).
That tax bill is calculated as follows for the 2015/6 tax year:
- R0 to R500,000 – No tax at all
- R500, 001 to R700,000 – taxed at 18% of the amount exceeding the R500,000
- R700,001 to R1,050,000 – taxed at 27% of the amount exceeding R700,000 and
- R1,050,001 and above – taxed at 36% of the amount exceeding R1,050,000
A Provident fund is pretty attractive to someone wanting all of their money. It was also pretty attractive to SARS as can be seen above. Problem was, once the pensioner had blown all their cash, who was going to have to pick up the pieces? The government of course!
The difference between a provident fund and a pension fund
The big thing with a pension fund is that you are limited to only taking one-third in cash at retirement. The one-third is also subject to the same tax rules discussed above. The remaining two-thirds must be used to buy what’s known as an annuity. You and I are more familiar with the term ‘pension’.
This rule will now apply to provident funds as well from the 1st of March 2016. That’s it folks. That’s what the big hoo-haa is about.
And none of this will apply in two instances:
- if you’re already 55 by the 1st of March.
- If your fund balance is less than R247,500 at retirement.
In both instances you will be entitled to take the full amount in cash.
Here’s some good news
From the 1st of March 2016, provident fund members may now claim the contribution to their provident fund as a deduction from their gross taxable income.
Employer contributions to your pension or provident fund will now be included in your gross income as a fringe benefit and you can claim the tax deduction
How much can you now contribute to your retirement?
The important thing to remember here is R350, 000.
From the 1st of March you can contribute 27,5% of the greater of:
- your gross taxable income, or
- your employment income
Subject to a maximum deduction of R350,000 per annum
Take Mike for example.
Mike earns R500,000 per annum. He can contribute R137,500 a year towards his retirement.
- R5,000 x 27, 5% = R137,500
He is allowed a deduction of up to R350,000, but since his contribution is only R137,500 that’s it. He is limited to the R137,500. This can be made up of contributions to:
- His Pension fund
- Provident fund, or
- Retirement annuity
Take Peter.
Peter earns R2,000, 000 per annum (Yes I know. He’s one of the fat cats)
- R2,000,000 x 27, 5% = R550,000
He is limited to the maximum deduction of R350,000 per annum.
So what are you waiting for?
Drop us an email and we’ll assist you in bumping up your retirement annuity.
Why your retirement annuity? Well, it’s the one thing you have total control over. Your pension or provident fund is controlled by the company you work for. In many instances, they also decide where it’s invested. And then there’s the administration fee which all depends on the size of your pension or provident fund.
Kind regards,
The InsuranceFundi team
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