Liberty retirement fund reform


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Liberty retirement fund reform

  1. 1. Update: Retirement Fund ReformGeraldine MacphersonLegal marketing specialist Gauteng
  2. 2. NT’s technical discussion papers
  3. 3. Compulsory preservation
  4. 4. Compulsory preservation• One of the 2 biggest culprits for the lack of retirement funding for so many has been identified as lack of preservation of benefits• The other one is the lack of annuitisation of provident fund benefits
  5. 5. Basic premises• Accrued and vested rights will be protected: • All funds held in retirement funds at the date of implementation will be subject to the “old” rules when it comes to access and withdrawals • Only new funds and new contributions will be subject to the new rules.
  6. 6. Basic premises• Retirement funds must “nudge” members into preservation: • Eg default preservation fund• Could consider making fund membership compulsory for all employees
  7. 7. Basic premises• Withdrawal mechanism on retrenchment could be extended to RAs and Preservation funds
  8. 8. Options under consideration:• Full withdrawal permitted with increased tax thresholds • Higher tax to discourage withdrawal• 3 -5 year monitoring period • Monitor the impact of the default position and if no change then re-visit• Partial withdrawal only • Eg 1/3rd
  9. 9. Options under consideration:• Maximum income per month • If unable to find employment• Full preservation with no withdrawals• Greater portability between funds (obligation to transfer and to accept benefits)
  10. 10. Provident and Pension fund alignment
  11. 11. Overall acknowledgment• Many trustees lack knowledge, skill and expertise required to perform their duties• Will introduce mandatory regular training
  12. 12. Enabling a better income at retirement
  13. 13. Enabling a better income at retirement• PROBLEM: • saving towards retirement is highly regulated, member’s hand is held the entire way: • Compulsory membership, contributions collected at source, investment decisions taken by trustees, only limited access to funds• BUT at retirement, member is thrown to the sharks and left to own devices entirely
  14. 14. Types of AnnuitiesLife Annuity (Conventional Annuity) Living AnnuityGuaranteed income for life Risk of longevityNo investment risk Investment riskFixed draw down Variable draw downNo ongoing advice High adviceRelatively well costed, CPI linked annuities High costs, layered costsa possible concern May only be sold by registered life insurance companies
  15. 15. Stats Types of annuities sold 2003 50% Life annuitiesSize of the Annuities market 2011 14% life annuities2003 R8 billion2011 R31 billion plus Commission on a LA up to 10 x Average drawdown is 7.5% plus charges higher than life Average drawdown is 7.5% plus charges ==10% annuity 10% 22out 33chance that income will drop by Only 10% of out chance that income will drop by 30% in real terms while alive policies sold by 30% in real terms while alive brokers are life annuities
  16. 16. NT’s challenge• Considering ways to: • Reduce the cost of living annuities and • Reduce the level of financial advice required
  17. 17. Potential new vehicle• Tax free vehicle based on investment collective schemes out of which retirement income can be paid › No investment choice › BUT may choose between different vehicles with different underlying investments › May switch from one to another › Restricted drawdown › Restricted commission › Prudent investment regulations (Reg 28)
  18. 18. Increased assistance to retirees• Fund to have a default retirement income product• Member may opt out of the default
  19. 19. Improving tax incentives for retirement savings
  20. 20. Improving tax incentives for retirement savings• Nearly R1 trillion is invested in SAs retirement market, mostly in the private sector!• Aim is to simplify tax treatment of contributions to the different funds• Increase rate across the board
  21. 21. Employer may deduct between 10% and 20% of approved remuneration of Employer may deduct between 10% and 20% of approved remuneration ofemployee as aabusiness expense. These contributions do not form part of employee as business expense. These contributions do not form part of the employee’s taxable income! the employee’s taxable income!
  22. 22. 2012 Budget proposals:• Employer contributions to funds will be taxed as a fringe benefit in hands of employees• Employee’s deduction iro own and employer contributions: • 22.5% capped at R250 000 • 27.%% capped at R300 000 • Min deduction R20 000 to allow low income earners to deduct in excess of the limits
  23. 23. 2012 Budget proposals:• Non deductible contributions will be exempt from income tax on retirement, against lump sum or annuity• Rollover – same as RAs• Contributions to risk and administration costs will be included in the maximum allowable deduction
  24. 24. What still needs to be decided?• Treatment of defined benefit and hybrid funds• Exact definition of the Income Base to which the percentages and caps will apply.
  25. 25. Incentivising non retirement savings
  26. 26. Incentivising non retirement savings• Focus is on low to medium income earners
  27. 27. • Current: • Proposed • Interest exemption • Scrap interest exemption • BUT not visible enough • Tax incentivised savings and vehicles • Restricts investment choice to interest bearing accounts
  28. 28. How will it work?• Earnings and capital tax free• Contributions made from after tax money• Caps on contributions: • R30 000 p/a • R500 000 per lifetime • If 45 -49: ¼ of lifetime limit • If 50 -59: ½ of lifetime limit • If over 60: max • In one transaction period• Savings vehicle must be registered with SARS
  29. 29. What will it be?• 2 options: Interest bearing Equity accounts accounts which which may invest may invest in bank in CIS s that hold deposits, JSE listed equities Retail savings OR or which directly bonds or interest own property bearing CIS s such as money market funds
  30. 30. Where to from here• Broad consultation• Feedback by the end of November• Policy decisions to be taken• Draft and then final legislation• WATCH THIS SPACE!
  31. 31. Thank youIn formulating the information in this document, Liberty has takendue care to ensure that the views and opinions are based oninformation which is relevant and accurate. While every care hasbeen taken before opinions and views are given, norepresentation, warranty or undertaking (expressed or implied) isgiven and no responsibility or liability is accepted by Liberty as tothe accuracy of the information contained herein. Anyrecommendations made must take into account your clientsspecific needs and personal circumstances. Any legal, technicalor product information contained in this document is not to beconstrued as advice by Liberty. Liberty Group Ltd is an Authorised Financial Services Provider interms of the FAIS Act ( no. 2409) 31