Matthew Lester: Retirement funds – tax havens of the new South Africa

By Matthew Lester

Iretirement just don’t understand the extraordinary move in the United Kingdom allowing pensioners to cash in their pensions. There can only be three reasons for the Tory party allowing this:

  • Immediate gratification amongst voters
  • Boosting tax receipts by taxing withdrawal benefits from pension funds
  • Providing Tory party financial advisers with a range of new private clients

The U.K. government reckons that citizens are responsible enough and sufficiently educated to self preserve their pension savings. Maybe, maybe not. Today the biggest threats to pensioners are not their own comfort but rather the aspirations of their children who are now the decision makers in the family.

The average Pom in the street would do well to recognize that despite all the moaning about the U.K. national health system the life expectancy of a Pom is far longer than most nationalities. A Pom who survives to 60 is predicted to live to 84. A South African who makes it to 60 is expected to survive to 76.

So the U.K. are saying that their responsible citizens are capable of preserving their savings for 20 years or more. I just don’t buy that.

Back to South Africa.

‘T day’ was supposed to happen on 1 March 2015. This was supposed to implement a range of new fiscal interventions to protect the pensions including a revised tax regime and the forced preservation of pension benefits.

But the unions were unhappy. So one of the first moves of the new minister of finance, Nhlanhla Nene, was to delay T Day implementation to 2016.

Apparently the principle gripe of the unions is the proposed forced preservation requirements to be applied to provident funds.

As things stand beneficiaries of pension and retirement annuity funds can only cash in one-third of the accumulated fund on retirement. On the other hand beneficiaries of provident funds can cash in the entire accumulated fund.

Part of the T Day package was to apply a forced preservation requirement on provident funds to bring them in line with pension and retirement annuity funds. Various provisions make sure that the T Day provisions will have no retrospective effect.

I predict that when T Day finally becomes a reality the proposed forced preservation requirements on provident funds will be diluted, if not abandoned. But my predictions are actually irrelevant.

I have no problem in cashing in on the benefits of the 2nd schedule of the income tax act. R500 000 tax-free is nifty. And maybe taking a further 18% on another R200 000 makes sense. But beyond that the tax rates of up to 36% are just punitive.

In South Africa there can be little benefit in cashing in any pension benefit beyond R700 000 before the cash is actually needed.

There has been so much hype around the new tax-free investments. But our retirement fund platforms have been providing these benefits for years. And contributions to retirement funds qualify for a handsome tax deduction to boot. It’s a no-brainer actually, retirement funds are the tax havens of the new South Africa.