Proposals in relation to the retirement fund industry

The Minister of Finance has announced various proposed amendments to the taxation regime of retirement funds which we discuss below.

25 Feb 2022 3 min read 2022 Special Edition Budget Speech Alert Article

Clarification on the transfer of total interest in a retirement annuity fund

Under a current reading of the Income Tax Act 58 of 1962, the transfer by members of their retirement interest from one retirement fund to another is permitted, subject to certain conditions that include, inter alia, transfer to a similar type of retirement fund or a fund that imposes more restrictions than the current one. The Minister of Finance (Minister) has expressed recognition of the fact that these conditions may result in retirement annuity fund members with more than one contract in a particular fund being constrained in their ability to transfer one or more contracts from one retirement annuity fund to another. Preservation funds are, however, not restricted on the proportion of their retirement interest that can be transferred into another fund.

To address this, the Minister proposes amending the relevant legislation, to allow fund members to transfer one or more contracts in a particular retirement annuity fund, subject to certain conditions to ensure that the current minimum thresholds are not contravened.

Clarification on the applicability of tax-neutral transfers from a pension to a provident fund

The Minister has identified that pursuant to various amendments to the retirement fund regime, the current provisions of the Act create an anomaly in that transfers from a pension fund to a provident fund related to contributions made before 1 March 2021 are not tax-neutral. It appears that there was no policy intent for the tax-neutral transfers to apply exclusively to transfers after this date, and the Minister has proposed that contributions to a pension fund before 1 March 2021 also receive tax-neutral transfer status. As a result, transfers to a provident or provident preservation fund are proposed to be tax-neutral irrespective of the type of retirement fund from which the retirement interests were transferred and the timing thereof.

Clarification in respect of the compulsory annuitisation and protection of vested rights when transferring to a public sector fund

The Minister has expressed the view that the current provisions of the Act forfeit the protection of historical vested rights if a transfer of rights is made into a public-sector fund. This follows tax changes in 2013, which resulted in amendments to annuitisation requirements for provident funds and provident preservation funds. These amendments were intended to preserve retirement fund interests during retirement and to ensure consistent tax treatment (regarding the requirement to annuitise retirement benefits) across the various retirement funds. The intended result would be that provident funds would be treated similarly to pension and retirement annuity funds, and provident preservation funds would be treated similarly to pension preservation funds.

These amendments came into effect on 1 March 2021, subject to the protection of historical vested rights. The irregularity is owing to the pension fund and provident fund definitions not making any reference to the protection of vested rights for individuals who were members of a provident or provident preservation fund as at 1 March 2021. To address this irregularity, the Minister proposes amending the pension and provident fund definitions to ensure that historical vested rights remain protected, even if they are transferred to a public-sector fund.

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