The long awaited change to harmonise the various retirement fund taxations will become a reality on 1st March 2016.
The current situation treats company pension and provident fund contributions under one limit and retirement annuities under a different limit. Provident funds are able to be fully redeemed on retirement, whereas pension and retirement annuities are limited to ⅓ of fund value.
The new rules are as follows:
Under the new rules, all retirement funds are treated the same, and the tax deduction will apply to the total of all contributions made, including employer contributions.
The maximum tax deduction that will be allowed will be limited to 27.5% of remuneration or taxable income, capped at R350 000 per year. Any excess contributions will be carried forward, to be deducted in future years, or at retirement.
The impact of this rule is that you are able to benefit further than at present if your taxable earnings are below R1.3 million per year. Beyond that level, your taxable benefit is restricted to R350 000.
Withdrawing a lump sum
Under the new rules, all retirement fund contributions made after 1 March 2016 are subject to a maximum lump sum withdrawal of ⅓ of fund value, with the balance being converted into an annuity. There is a transitional exemption for existing provident fund values and also for small funds. We can provide details to you where appropriate.
The tax on lump sums remains, where the first R500 000 is tax free, with progressively higher rates being applied beyond that level.
Please consult your Wealth Adviser if the changes above will have the potential of restricting your tax deduction, or you want to increase your retirement savings.