The impact of retirement reform coming into effect on 1 March 2016

This document incorporates the revisions to these laws, as announced by National Treasury on 16 February 2016.

The Taxation Laws Amendment Act, 2015 has passed some of Government’s retirement reform proposals into law. The new rules are designed to harmonise the tax treatment for all types of retirement funds (ie pension, provident and retirement annuity funds). The new rules will take effect on 1 March 2016.

In summary, from 1 March 2016, the deduction cap for retirement fund contributions increases to 27.5% of the greater of remuneration or taxable income. This rate applies to the aggregate of contributions made to an individual’s pension, provident and RA funds. Presently, different contribution caps and deduction bases apply to the three types of funds.

The annual deduction cap is R350,000 (including the cost of risk benefits). Individuals who contribute more in any one year can carry forward any unclaimed amount and deduct these from tax in subsequent years, subject to the deduction limits in those years. Any unclaimed contributions are returned untaxed at withdrawal or retirement.

Only the employee may claim contributions (both in respect of the employer and the employee contributions). The employee’s PAYE deduction must be adjusted to reflect these contributions. If the employer makes the contribution, this must be neutralized by way of a fringe benefits tax charge levied on the employee.

These reforms initially included a provision that provident fund members must, from 1 March 2016, use two-thirds of their fund benefit to purchase an annuity at RETIREMENT. The implementation of this requirement was postponed to at least 1 March 2018. At that point this law may either become effective, or be scrapped. If scrapped, National Treasury will revisit the tax deduction available on contributions to provident fund (with a view to lowering these).

For now, therefore, there is no requirement for provident fund members to annuitise any part of their benefit at retirement.

On RESIGNATION, the full amount can still be claimed as a lump sum, irrespective of whether you belong to a pension or provident fund (or to the GEPF!)

The annuitisation threshold for pension and RA fund members increases R247 500 on 1 March 2016 (previously R75 000).

How will legislative changes affect employees?

Tables 1, 2 and 3 compare the current and revised rules for pension, provident and RA fund members respectively. Below, we highlight some general and specific issues.


Both pension and provident members may be affected the newly-introduced annual contribution cap of R350 000. This cap includes the premiums paid in respect cover attached to the fund (in essence Group Life and Disability income cover). Members who currently pay more than R350 000 (by way of their and/or their employer’s contribution) will, from 1 March 2016 pay tax on the contributions above the cap and will accordingly see a reduction in their take-home pay.

Members may benefit from the new definition of the base against which the deduction is measured. This base is now the higher of “gross remuneration or taxable income”. The base was previously defined as “approved remuneration” for pension funds and “pensionable income” for provident funds (as defined by the employer).

The reference to “taxable income” effectively enables pension and provident fund members who receive outside income (for example derived from rental income, alternate employment or investments) to claim a pension fund deduction against such income. Previously such “outside” income could only be used to claim deductions on RA contributions. Members who wish to top up their retirement fund savings will no longer need to take out a separate RA.

Pension fund members

Pension fund members are least affected by these changes as the current pension fund model is effectively becoming the “standard” retirement fund model. One notably change is that the minimum fund balance requiring annuitisation will increase from R75 000 to R247 500.

Provident fund members

Provident fund members will benefit from a larger tax deduction (in percentage terms) on contributions made to their provident fund. The effective increase is from 20% of pensionable income to 27.5% of gross remuneration or taxable income. Provident fund members who currently contribute to their fund will see an increase in their take-home pay as they will now receive a tax deduction on their contribution.

RA funds

RA investors are impacted positively by these changes. They will now receive the same tax deductions as other savers, and they will also be able to claim RA deductions against pensionable or retirement-funding income (within the prescribed limits).

In addition, the minimum fund balance requiring annuitisation will increase from R75 000 to R247 500.

Table 1: Impact of 1 March 2016 changes on pension fund members
Table 2: Impact of 1 March 2016 changes on provident fund members
Table 3: Impact of 1 March 2016 changes on RA fund members

How will legislative changes affect employers?

Companies who make employer contributions can deal with these changes in two ways:

  1. Keep the employer contribution: They can maintain the employer contribution, levy the fringe benefits tax and show (increase) an employee retirement fund contribution, thereby reducing the employee’s tax deduction. This will create some additional payroll admin, in terms of processing the fringe benefits tax. These are payroll issues – the employer must simply fill in the required fields on the system. The 27,5% contribution limit must be linked to remuneration, not pensionable salary.
  2. Provide for employee-only contributions: They can also convert the employer contribution into an employee contribution. To do so, they would add the value of the employer contribution to the employee’s salary, and increase the value of the employee contribution accordingly.

This will however require a change to the Special Rules and SLA, to reflect the revised contribution regime (from employer to employee contributions). The permitted employee contribution rates would also have to change, to facilitate the new contributions. These may have to be finessed to ensure the employee’s take-home pay does not change.

As the “pensionable salary” has effectively increased, the risk cover premium will increase. Employees will however have a bigger cover.

All this must be communicated to members beforehand and made a term of their employment.

The benefit of this option would be to reduce the fringe benefits tax-related administration over the long-term.

Employers should also be aware that the contribution cap includes administration costs and risk premiums paid out of these contributions. If employers wish to maximise their employees’ allocation to retirement savings, they can consider paying the fund administration fees separately and/or moving to “unapproved” risk benefits, which are not attached to the fund, and which are not paid out of contribution.

If the employer’s contribution does includes risk premiums for an unapproved scheme (group life or income disability), the employer must levy a fringe benefits tax on these premiums and ensure that employees do not claim that part of the contribution as a tax deduction.

Get investment and saving tips straight to your inbox.

Related articles

Tax cap on retirement fund contributions: what should high savers do?

To save within or without a retirement fund? Thus far, this question has required little debate. The...

Compulsory annuitisation: leaky arguments can’t plug leaky system

Briefing Parliament’s finance committees on 3 March 2016, Ismail Momoniat (National Treasury Deputy...

Delayed retirement reforms should not delay you reforming your retirement

The retirement reforms set to have taken effect on 1 March 2015 have been delayed, possibly until 20...

Get started or switch to 10X today.