Retirement fund members may, as of tomorrow, have a little more freedom to choose when to retire, but the Budget Review published with the Budget on February 25 warns that you will not be able to delay retirement indefinitely to avoid tax.
A section in the 2014 Taxation Laws Amendment Act, which becomes effective on March 1, entitles you to phase your retirement from a fund, continuing to work full-time or part-time after your retirement date, or drawing on your discretionary savings or your savings in another retirement fund, until you need the savings in the fund from which you retired to buy a monthly pension. This is because the Income Tax Act no longer forces you to start drawing a pension on the date on which you retire.
However, the Budget Review states that, although last year’s amendment gives you greater flexibility and could encourage the preservation of retirement fund benefits, National Treasury and the South African Revenue Service (SARS) believe that the Income Tax Act should again be amended to introduce a maximum age at which you must start drawing from your retirement savings.
Chris Axelson, the director of personal income taxes and savings at Treasury, says Treasury wants you to be able to phase your retirement, but it wants to prevent the provision from being misused to avoid paying estate duty.
An amendment to the Estate Duty Act will also be proposed to prevent retirement funds from being used to avoid estate duty. The Budget Review notes that this would be in line with similar retirement-funding arrangements in other countries.
The proposed amendment is likely to be included in this year's Taxation Laws Amendment Bill, which will be published in about the middle of the year. The Budget Review makes no reference to any age for such a proposal, but in the United Kingdom retirement fund members are currently forced to take retirement by age 75.
In South Africa, until 2008, the age to which you could contribute to a retirement annuity (RA) fund was 69, and you had to draw a pension from age 70.
The Income Tax Act states that any lump-sum benefit from your retirement fund accrues to you on the occurrence of certain events, including the date on which you elect to recover the benefit and the date on which you retire.
Last year’s Taxation Laws Amendment Act deletes the reference to the date on which you retire, which means that, from March 1, your retirement benefit will accrue to you only on the date you elect to receive it.
Kobus Hanekom, the head of strategy, governance and compliance at Simeka Consultants & Actuaries, an affiliate of Sanlam Employee Benefits, says that because last year’s amendment introduces the principle of phased retirement, retirement funds technically have no say in the matter and should amend their rules to accommodate this.
He says employer-sponsored and umbrella funds need to amend their rules to be able to charge fees on savings left in the fund and to have “a retail-type” relationship with you after you have stopped working. Your employer will no longer contribute to the fund and will no longer contribute to any life or disability benefits you enjoyed while employed.
Hanekom says Simeka believes funds should amend their rules to provide properly for the new class of members who want to retire later than their retirement from employment, and many funds administered by Sanlam have done so.
Soré Cloete, a legal adviser at Old Mutual, says many funds administered by Old Mutual are amending their rules because of requests from members to leave their savings invested after they retire.
However, some funds do not plan to let you do this. Axelson says that, although Treasury recognises the benefit of funds allowing you this flexibility, they will not be compelled to allow it.
Hanekom says fund members should have the flexibility to decide when to retire, for two important reasons: people are living longer in retirement and the world of work is changing, with retirement dates being set earlier despite the fact that people are productive for longer.
The reality is that many members simply cannot afford to retire at their normal retirement age, while others “have no intention of hanging up their boots and want to embark on a second career”, Hanekom says.
You could consider transferring your savings in an employer-sponsored fund to an RA before you retire from your job, but this is likely to have cost and commission implications, he says.
In addition to providing flexibility on when you start withdrawing your retirement savings, the amendment to the Income Tax Act that takes effect tomorrow was also intended to address an administrative problem.
The explanatory memorandum and National Treasury’s response document on last year’s Taxation Laws Amendment Bill said the measure was intended to ease administrative difficulties that arise for retirement funds when members do not inform their funds, before the date on which they retire, how they want to take their benefits. Funds are then unable to apply on time to SARS for tax directives – for example, if you have not informed your pension fund how much you want to take as a lump sum.
The National Treasury document published in response to comments on the bill stated that the amendment was intended to provide consistency and to provide members with the option to receive their benefits later, but only if this was allowed in terms of a fund’s rules.
“The tax amendment has no bearing on the obligations of the fund to allow an individual to receive their retirement benefits at a date past their normal retirement age (or their ability to retire earlier). Decisions on the ability to allow members to retire later, the assets in which their fund will be invested during this period, and their risk benefits and fund costs will be determined by the fund rules,” the response document stated.
BENEFITS OF RETIRING LATER
Fund members who preserve their retirement savings beyond retirement can greatly improve their replacement ratio (the ratio of their income that they receive as a pension). This is because your retirement savings have more time to grow, the growth compounds over the years and you retire when you are older, so you have fewer years in retirement for which you must fund an income.
In Simeka’s latest Baobab bulletin, Richard Tyler, Simeka’s managing director, says a man with a replacement ratio of 50 percent at age 60 can retire with a replacement ratio of 68 percent at age 65 and 94 percent at age 70, by leaving his or her retirement savings invested, without making further contributions, and with a return of just four percent a year.
Phasing your retirement can also enable you to postpone your retirement until interest rates are higher and the time is right to buy a guaranteed annuity. (Guaranteed annuities pay a pension for life, but the pension you receive depends on interest rates when you buy the annuity.)