Retirement funding is divided into three elements for taxation purposes. They are: Contributions; the investment build-up of the fund (both capital growth and income); and Benefits (what you are paid out when you retire, either as a lump sum or a monthly pension). Below we show the effect of the Katz Commission recommendations and the recent Budget proposals on the three elements.
PRE MARCH 1 1996
CONTRIBUTIONS (Exempt)
Individuals: pension fund
Maximum deduction from total pay of 7,5 percent arrear pension R1 800
Individuals: Provident fund
No deductions allowed
Individuals: Retirement Annuity Funds
Maximum deduction of the greater of 15 percent of the taxable income (excluding the 7,5 percent allowed for pension contributions); or R3 500 less pension fund contributions; or R1 750
Companies
Maximum 20 percent contribution of individual's salary to pension, provident and benefit fund
Civil Service Funds
No limits on individual or employer contributions
INVESTMENT BUILD-UP (Exempt)
No income tax on either capital gains or investment income (interest rental and dividends)
BENEFITS (Taxed)
Private Sector Funds
Lump sums taxed at average income tax rate. The higher t rate of either the year of retirement or the immediately preceding year applies.
Tax free portion based on years of membership of the fund, usually a maximum amount of R120 000.
Monthly pensions taxable on receipt according to normal tax tables.
Public Sector Funds
Lump sums fully tax free.
Monthly pensions taxable in the same manner as private sector pensions.
KATZ RECOMMENDATIONS
Proposed structure applies to both private and public sector funds but it will take into account the vested rights (the tax free rights that already exist) of civil servant retirement funds.
A unitary retirement fund structure with no difference in treatment of provident , pension and retirement annuity funds.
CONTRIBUTIONS (Exempt)
Deductibility up to 7,5 percent of pay for individuals and 15 percent for employer ( thus a total of 22,5 percent). This would apply to individuals in both the private and public sectors.
In the case of a self-employed person or non retirement income and maximum contribution of 22,5 percent to any retirement vehicle.
INVESTMENT BUILD-UP (Taxed)
Interest, rental and other trading income taxed at a flat rate of a maximum of 30 percent after deduction of expenses.
BENEFITS (Taxed)
Total accrued retirement benefits taxed at retirement, regardless of what is taken as a cash lump sum or as a pension. A maximum amount of R380 000 can be exempted from tax if an amount of R540 000 of the retirement payout is used to purchase a monthly annuity (pension).
Tax on the taxable portion according to a new sliding scale (R1 to R150 000 at 15 percent; R151 000 to R450 000 at 25 percent; R451 000 to R750 000 at 35 percent; and above at 45 percent.Monthly annuities (pensions) will be tax free. The investment income on the capital used to buy a pension will be subject to the build-up tax (maximum 30 percent)
CHANGES IN 1996/97
BUDGET
CONTRIBUTIONS (Exempt)
Status quo. No implementation of Katz recommendations
INVESTMENT BUILD-UP (Taxed)
Net rental and gross interest earned by retirement funds taxed at 17 percent. Portion of fund in respect of existing pensioners remains tax free.
BENEFITS (Taxed)
Status quo. No implementation of Katz recommendations
PRINCIPLES ACCEPTED IN 1996/97 BUDGET BUT NOT IMPLEMENTED
* Equal treatment of provident and pensions funds, as well as tax neutrality between all forms of retirement funds.
* Taxability of full fund benefit at retirement, but incentive to encourage people to take a monthly pension.
* Vested rights of public sector funds up to date of change will be protected.
* In the case of private sector funds a five;year phasing in period will apply when calculating the tax free portion of a lump sum.