By Matthew Lester*
The preservation playing field between pension funds and provident funds will be levelled from 1 March 2016. But the important point is that few employers could ever afford to go back to defined benefit pension funds. It’s a non-starter.
So the next question is ‘what about a retirement annuity fund?
‘Hell NO!’ say the crowd, ‘my Dad had one of those and it was an absolute ripoff!’
Again there is a history to this saga that begins again a long time ago in a galaxy far away.
Most of SA migrated from defined benefit pension funds to provident funds between 1980 and 2005. They didn’t migrate to retirement annuities. Why? Because retirement annuities were primarily designed to cater for the self employed and didn’t take into account tax deductions on employer contributions. In general employees only made use of retirement annuities in supplementary retirement planning.
The commission structures of the old retirement annuities were a disgrace and paid for many luxury cars and overseas trips at the expense of the investor. But, thanks to years of crusading by Bruce Cameron and Personal Finance that’s changed now. We never did acknowledge Bruce’s contribution properly. He should have got a gold class bravery award at least.
The commission structures of the modern retirement annuity are acceptable to me. And far better than some I have seen charged on other investment products. So I am not put off retirement annuities today by cost structures. Some may disagree.
Along with the new compulsory preservation requirements imposed on provident funds comes a new tax deduction package that further levels the playing field between pension, provident and retirement annuity funds.
From 1 March 2016 the tax deductions granted on all retirement funds is regulated through the personal income tax computation. Gone are the days of different tax deductions for different funds that have only served to fail tax students for so many years.
The new system works on the basis that all contributions to all funds are amalgamated irrespective of whether they are made by employer or employee. Then an overall deduction is granted on all contributions to all retirement funds, limited to 27,5% of taxable income or R350 000 per annum.
So, there is no advantage between the various retirement funds, be it from a preservation or tax profile perspective. This now creates the important point that one no longer needs an employer involved in the retirement planning space.
Long ago it was almost assumed that an employment relationship would last a lifetime. And retirement planning was based on just that. But today it goes rather that if you want to talk loyalty get a dog.
Employees of today see no problem in changing jobs 4 or 5 times in a career. This is considered a healthy career plan.
So why would an employee want to attach a retirement plan to one particular employer? Rather custom-build your own retirement plan based on retirement annuity funds.
For that matter, given the recent changes to the taxation of group life schemes many younger employees may well do better by facilitating their own life insurance outside of the employer/employee relationship.
There are a lot of consequences coming from the latest tax and preservation amendments. Correctly applied I think the package provides a range of new opportunity. There is work to be done.