Aspects of the 2022/2023 budget that impact on retirement funds
RETIREMENT FUNDS SUMMARY The proposed Two-Pot System will proceed, with draft legislation expected mid-year;
Regulation 28 to the Pension Funds Act will be amended to enable greater infrastructure investment and the limit on foreign investment is to be increased to 45%;
COFI is expected to be tabled in Parliament early in 2022;
Administrative changes are made to protect a member’s vested rights when transferring to a public sector fund, to remove the minimum early retirement age of 55 in a provident fund, and to ensure consistency in allowing tax neutral transfers from pension to provident funds;
The taxation of retirement benefits remains unchanged.
RETIREMENT FUNDS – POLICY CHANGES TO BE IMPLEMENTED THIS YEAR TWO-POT SYSTEM In December 2021 National Treasury released a paper dealing with preservation and the two-pot system, where members would be permitted to access part of their retirement savings prior to retirement, on condition that the balance is preserved until retirement.
National Treasury has indicated that this proposal will proceed, with draft legislation expected by mid-year. In his speech, the Minister of Finance referred to the ultimate decision-maker regarding these early withdrawals as being the trustees of a fund. This would place an enormous burden on trustees. It would be preferable for the system to allow for automatic access to a specific portion of a member fund benefit.
Legislation is awaited to determine exactly how it is envisaged that the two-pot system will work.
REGULATION 28 – INFRASTRUCTURE AND FOREIGN INVESTMENTS The Minister of Finance initiated a process to amend regulation 28 to enable greater infrastructure investment by retirement funds and to improve reporting on such investment by the funds. National Treasury has advised that the amendments will be gazetted into law by March 2022. With regard to foreign investments, the limit is to be raised to 45%, inclusive of the 10% allowance for investment in Africa.
THE CONDUCT OF FINANCIAL INSTITUTIONS BILL (“COFI”) National Treasury has advised that it has revised the Conduct of Financial Institutions Bill based on feedback from stakeholders. The bill is expected to be tabled in Parliament in early 2022. The purpose of this legislation is to empower the Financial Sector Conduct Authority to deliver the mandate set out in the Financial Sector Regulation Act, which includes the fair treatment of customers and the integrity of the financial system.
RETIREMENT FUNDS – ADMINISTRATIVE ADJUSTMENTS Several technical amendments to the Income Tax Act have been announced, these include:
Removing an anomaly whereby the Income Tax Act allows members of a preservation fund with different “contracts” in that preservation fund to transfer a portion of their total benefit to another fund but does not allow the same to happen on transfer between retirement annuity funds. It has been announced that this will be changed.
With regard to compulsory annuitisation, clarifying the provisions regarding protection of vested rights when transferring to a public sector fund. The annuitisation amendments to the Income Tax Act which include protection of vested rights arising from membership of provident funds and provident preservation funds were not extended to protecting these rights on transfer to a public-sector fund. To address this anomaly there is a proposal to amend the pension and provident fund definitions to ensure that historical vested rights remain protected even if they are transferred to a public-sector fund.
TAXATION OF RETIREMENT BENEFITS The tax tables for early withdrawal benefits and lump sum retirement benefits remain unchanged. The contribution deduction of 27,5% per annum (with a cap of R350,000) of the greater of taxable income and remuneration also remains unchanged and applies to members of all retirement funds.
It is worth remembering that all retirement funds require a compulsory annuity purchase upon retirement with two-thirds of such fund benefits, subject to the exceptions in respect of so-called vested benefits related to membership of a provident fund or provident preservation fund prior to 1 March 2021 or all such benefit where a member of a provident fund or provident preservation fund was fifty-five or older on 1 March 2021.
The threshold below which a full fund benefit, excluding the vested benefit, may be taken as a cash lump sum remains R247,500.