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Pension and provident funds

Article provided by Paralegal Advice

  

The main aim of a pension or provident fund is to provide benefits for its members when they retire from employment. The fund also usually pays benefits when a member dies while still working, or is unable to work because of illness, or is retrenched.

  

The difference between a pension fund and a provident fund

  

The main difference is that if a pension fund member retires, the member gets one third of the total benefit in a cash lump sum and the other two-thirds is paid out in the form of a pension over the rest of the member's life. A provident fund member can get the full benefit paid in a cash lump sum.

  

There are advantages and disadvantages to getting all your benefits in a lump sum. One disadvantage is that you may spend a lump sum very quickly. Then there will be nothing left as pension for the rest of your life . Then you will have to apply for a state pension. But if you invest the lump sum wisely you should not have this problem.

  

An advantage of getting a lump sum payment is that you avoid all the problems in getting a private pension every month. Insurance companies and other pension funds will pay a private pension into a bank account if you have one, or else send a cheque to your home address, or to your old employer who will then pass on the payment. But if you have no bank account or live in a place where the postal system is very unreliable, you might have great difficulty receiving and cashing your pension cheque every month. A lump sum will help to avoid all these problems.

 

For workers who are not well paid, the amount of a monthly pension may be so small that it gives them no security anyway. People also sometimes feel suspicious about leaving their money with pension fund companies after they retire. They would rather have the money to look after themselves. A person who gets a lump sum may be able to put this towards buying a house or plot of land, while a person retiring to a rural area may use it to buy cows, goats, and so on.

   

The provident fund is usually more flexible than the pension fund. Part of the lump sum can be used to buy a private pension through a private pension company. The main advantage of a pension fund is that it is paid for life. The pension will be paid out until you die. This offers you security because a certain amount of money will be coming in every month. If you are not disciplined to deal with a large sum of money, then it is better to get the money paid out in small amounts every month.

  

Pension funds offer better tax benefits to the worker. A worker's contributions to a pension fund are deductible for tax, while contributions to a provident fund are not. No tax is payable on a lump sum of R30 000 or less (at March 1998) paid out by a provident fund.Trade unions usually demand provident funds for their members. They feel that many pension funds are very old and have rules which don't take into account the interests of workers. Most provident funds were established more recently and have rules which suit the interests of workers. But pension funds can have rules that are as good as any provident fund.

 

The strongest argument in favour of provident funds and the lump sum payment concerns the means test used to work out whether a person qualifies for a state old-age pension. Usually if a person receives a private pension, that person is disqualified from receiving a state old-age pension. If a person gets a lump sum payment then that person can also qualify for a state pension in some cases.

 
The state old-age pension, the means test and private pension or provident funds

 

The maximum amount that you will get is R1 420 per month. If you are older than 75 years, you will get R1 440 (January 2016).

  

How does a pension or provident fund work?

 

Money goes into a fund through contributions from employers and employees (sometimes only employers contribute to the fund). These funds gain interest when the insurance company's invest them. Money goes out of the fund to pay for benefits and also for the expenses of running the fund. The money in the fund belongs to the fund and not to the people who contribute.

 

But pension and provident funds exist for the benefit of their members, who are workers and pensioners. Usually it is compulsory to become a member of a fund. This means that a worker does not choose whether to belong to the fund or not, the worker must belong to the fund if the employer has a fund. A worker cannot get money back from a fund except as benefits according to the fund rules.

 
Types of benefits

 

Normally a fund has these kinds of benefits:

  • withdrawal benefits, paid to workers who resign or are dismissed
  • retrenchment benefits, paid to workers who are retrenched
  • retirement benefits, paid to workers when they retire
  • insured benefits, including benefits paid to a worker who is disabled and benefits paid to the dependants of a worker who dies.

 

Not all funds provide all these benefits. To understand how any fund works, the member must read the rules of the fund.

 

Withdrawal benefits

 

Withdrawal benefits are paid to workers who leave work either through dismissal or resignation before they are due to retire. Usually, if a worker resigns and withdraws from a pension fund, only the worker's own contributions to the fund are paid out, plus very small interest on those contributions. The worker might not get the employer's contribution to the fund. Usually, provident funds pay out better withdrawal benefits than pension funds. But the rules of pension funds can be changed to improve withdrawal benefits.


Retrenchment benefits

 

Not all funds allow retrenchment benefits. If there is a retrenchment benefit scheme, then usually the worker will get his or her own contributions, AND the employer's contributions as well as full interest.

 

Retirement benefits

 

The benefit on retirement depends on how long the worker was a member of a fund, and the final wages of the worker before retirement . Usually the age of retirement for men is 65 years and for women it is 60 years. Different funds have different ways of calculating retirement benefits. The rules of each fund set this out.

  

Insured benefits

 

Insured benefits mean that benefits are paid to the member or the member's widow and dependants if the member becomes disabled and so cannot carry on working, or if the member dies while still employed.

 

Bargaining Council funds

 

A pension or provident fund may be established by a Bargaining Council Agreement. The Bargaining Council Agreement will lay down the rules for the pension or provident fund. Usually all workers who fall under a Bargaining Council Agreement have to become members of any fund set up by that Bargaining Council, unless their employer has de-registered from the fund and set up their own fund.

  

Bargaining Council funds do not allow a worker to withdraw benefits if he or she leaves one company to go and work for another company in the same industry. Usually a worker can only withdraw benefits after a year of leaving the company, if he or she is still unemployed or was re-employed outside the industry. If the worker is re-employed in the same industry before one year is up, then contributions carry on as if there was no change in job.

  

Complaints about payments from pension funds

 

Any person who has a complaint about money that they think a pension fund owes them, for example death benefits or retirement benefits, can make a complaint to the Pension Funds Adjudicator.

 

Pension Funds Adjudicator

 

The law says you must first send your complaint in writing to the pension fund or to the employer. The pension fund or employer then has 30 days to reply to the complaint. If they don't reply, or if you are not satisfied with the reply, then you can send your complaint to the Pension Funds Adjudicator. Include your letter to the pension fund or employer, and their reply. There is no charge to make a complaint with the Pension Funds Adjudicator.

 

After you have made a complaint to the Pension Funds Adjudicator, the Adjudicator gives the pension fund 30 days to reply. Once the Adjudicator has received the pension fund's reply, they will look at the facts and decide who is right. The Pension Funds Adjudicator does not deal with government pension funds. If a person who works for the government has got a complaint about a government pension then they must send their complaint to the Public Protector.

  

Who can make a complaint to the Pension Funds Adjudicator?

 

The following people can make a complaint to the Pension Funds Adjudicator:

  • a member or former member of a pension fund
  • a beneficiary of a fund or a former beneficiary of a fund
    (a beneficiary is someone who is written down in your pension fund agreement to get the money from your pension fund, for example your family if you die)
  • an employer who participates in a workplace fund
  • a board or board member of a fund
  • any person with an interest in a complaint

 
Time limits

 

You must get your complaint to the Pension Funds Adjudicator within 3 years of the problem arising. There is a long waiting list of complaints that need to be dealt with by the Pension Funds Adjudicator. A person who sends in a complaint will usually have to wait about 15 months for the case to be solved. It doesn't help to telephone the Pension Funds Adjudicator office - they will contact people who have made complaints once they have dealt with the case.

 

 

 

GEPF not affected by new tax legislation
by Staff Writer

 

The Government Employees Pension Fund (GEPF) has assured its members and pensioners that the new Taxation Laws Amendment Act will not affect their pensions or benefits.

 

The fund is SA’s largest pension fund and investor, with about 1.2-million members and more than R1-trillion in assets under management.

 

It pointed out on Monday that as a defined benefit pension fund‚ the benefits of the fund were already taken as a one-third lump sum gratuity and the remaining two-thirds were taken as a pension.

 

The fund said the changes would, however, affect the recording and attribution of the employer’s contribution in respect of active members. It would also increase the amount that could be contributed to the fund tax-free for the majority of its members.

 

The new tax laws were put in place to safeguard the retirement savings of all South Africans who contribute to retirement funds.

 

These changes will mostly affect members of provident funds, who will now have to split their retirement benefit between a one-third lump sum and two-thirds pension on the portion of their benefits accumulated after March 1 this year, while retaining the right to take all amounts accumulated until this date as a lump sum.

 

GEPF principal executive officer Abel Sithole stressed that the fund continued to work for the financial security of its members and pensioners.

 

"Members of the GEPF will be able to access their pensions after March 1 2016 in exactly the same way as they can be accessed currently.

 

"None of the calculations and benefits will change due to these changes‚" Mr Sithole said.

 

He urged members not to panic and consider leaving the fund to access their full pension benefits.

 

He said the new act would not take away the right of pension-fund members to withdraw their benefits before or at retirement as a lump sum.

 

Article published with the kind courtesy of www.bdlive.co.za

 

 

 

 

 

President did not act unilaterally on the tax law
By The Presidency, 14 January 2016

 

President Jacob Zuma did not act unilaterally when signing the Tax Administration Amendment Act.

 

The law was considered at NEDLAC. It was also discussed openly in parliament. It was passed by both the National Assembly and the National Council of Provinces following public hearings.

 


Background to the law and what it seeks to achieve

 


1. Which tax law is the Government passing that affects retirement policies?

 

The Government is updating a law it passed in 2013 (in the 2013 Taxation Laws Amendment Act) that harmonised the tax treatment of contributions to retirement funds. Different types of retirement funds have different tax rules, and provident fund members enjoy no tax deduction for their contributions. Government also noted that high-income taxpayers also structure their salary packages to enjoy relatively high tax deductions, since employer contributions are not currently a taxable fringe benefit for the individual and are not recorded in tax returns. The 2013 law therefore harmonises the remuneration base for tax purposes for all retirement funds, and consolidates both employer and employee contributions to reduce the scope for tax structuring.

 

The 2013 law allows for a 27.5% tax deduction up to a maximum of R350 000 per annum. The key condition for enjoying the tax deduction is that members take a lump sum up to one-third, with the rest to be annuitised. This law should have been implemented on 1 March 2015, but was delayed by one year to take account of concerns raised by some stakeholders, including COSATU. The only change to the law that Government is considering this year is to confirm that the new law will take effect on the scheduled date of 1 March 2016 alongside an increase in the threshold above which members are required to purchase an annuity.

 

2. How will the tax and retirement reform benefit workers?

 

It is envisaged that workers will be encouraged to save (more) through retirement funds, to curb old-age poverty and excessive dependency on relatives. Members of provident funds will, similar to members of pension and retirement annuity funds, be able to claim a tax deduction on their contributions to their funds. There are over 2.5 million provident fund members who contribute to a provident fund. Around 1.25 million are likely to see an increase in their take home salaries, and many more will receive the tax deduction if they decide to save more for their retirement. Lastly, low savings can also result in excessive indebtedness, as individuals have to borrow to meet unexpected expenditure.

 

3. Will these changes make the tax system more equitable and progressive?

 

Yes, it will. The Government is concerned about tax avoidance structuring where high- income taxpayers are able to structure their remuneration packages to reduce their tax liability out of proportion to what Government considers to be fair. The abuse/avoidance is mainly by high income earners in provident funds, who exploit the fact that the employer contribution is a non-taxable fringe benefit, and hence have funds where employers make a 20 to 30% contribution with no contribution from the member.

 

The 2013 law, when implemented, will make the tax system more progressive, by improving vertical equity between high income and low income taxpayers, as it limits the tax deduction to R350 000. It will also improve horizontal equity by harmonising the same deduction across all retirement funds.

 

Since the purpose of the tax deduction is to encourage savings for retirement, it is important that the tax deduction is only available to members of a fund who intend to annuitise on retirement (even though the current changes to the law do not deal with preservation before retirement).

 

4. What are the objectives of the tax and retirement reforms?

 

The reforms seek to achieve the following: (1) Simplify the tax treatment of contributions to retirement funds (current system is complex and confusing); (2) Improve vertical equity between high and low income taxpayers by imposing a limit on the total allowable deduction to high income taxpayers; (3). Improve horizontal equity by harmonising the same deduction across all retirement funds; (4) Enhance post-retirement income by extending the requirement to purchase an annuity to provident funds. (5) Vested rights are protected, ensuring that the impact of annuitisation takes longer to be felt by provident fund members.

 

The Government is encouraging everyone who has a job or income to save for their retirement, and does so by allowing a tax deduction up to 27.5% of income (up to R350 000) on all contributions made towards a retirement fund. The Government also wants to be fair and allow this benefit to all members of any retirement fund –whilst members of pension and retirement annuities enjoy this benefit for their own contributions members of provident funds do not.

 

5. How will the new legislation apply to provident funds?

 

The effect of the alignment between provident and pension funds will take a long time to have an impact on members, and will not affect provident fund members who are currently close to retirement. All provident fund members will still be able to take all their retirement savings that would have been accumulated as at 1 March 2016 as a cash lump sum whenever they go into retirement.

 

The conversion of a portion of the retirement money into income at retirement will only apply to new contributions made by those who are younger than 55 when the legislation comes into effect. This means that members who are 55 years and older on 1 March 2016, when the law comes into effect, will not be affected, i.e. they will still be able to even take (new) contributions made after the legislation has come into effect as a cash lump sum in retirement.

 

Workers who are below 55 years on 1 March 2016, will not be asked to annuitise or take a pension on the portion of new contributions if the total of those accumulated savings are R247 500 or less (“de minimis rule”) when they reach retirement. Irrespective of age, whatever a member has accumulated in the provident fund as at 1 March 2016, and the growth on those amounts will be available to them as a cash lump sum when the person retires (i.e. protection of vested rights). For most low- and middle-income workers, it will take several years (more than five up to fifteen) years to reach the above threshold, and hence many years before they are asked to annuitise at retirement.

 

6. Why should provident funds members not worry about the changes?

 

The first point to make is that the reforms do not take away the right of provident fund members to their benefits before or at retirement. Instead, the reforms enable a slower use of such benefits in retirement, by requiring annuitising from a certain amount. The data indicates that 83.5% of provident funds members fall in the R160 000 and below income bracket, and that the majority of them retire with an average retirement benefit of R300 000 (note that this average includes higher income members). These data, coupled with protection of vested rights and a higher de minimis amount of R247 500 (i.e. the amount below which you do not require annuitising) leads to the second point that most, if not all, low income earners approaching retirement in at least the next two to five years (and longer), will not be required to annuitise.

 

7. Will members have access to their pension or provident fund upon resignation or losing a job?

 

Yes. The implementation of the Taxation Laws Amendment Act will not take away the right of provident or pension fund members to withdraw their benefits before or at retirement as a lump sum. Contrary to false rumours, Government has NO intention to take-over the hard-earned deferred income of workers, whose funds will remain under the control of their trustees. Government has also improved the law to ensure better governance practices by trustees, and intends to strengthen these further. Further, with the full support of all labour unions, Government (as part of its retirement reform programme):

 

• Passed a law in 2013 to criminalise the non-transfer/payment of member contributions to the fund;

 

• Initiated policy discussions on the lowering of high charges, and the selling of inappropriate annuities by the retirement industry.

 

8. What happens if a member of a provident fund wants to access his/her retirement benefit upon resigning?

 

Members will be able to take all their retirement savings as a cash lump sum upon resignation (with tax implications). However, members of both pension and provident funds are encouraged to keep their savings until retirement (i.e. preserve their savings), and Government intends to ensure that members seek proper financial advice from their pension and provident funds before withdrawing such funds. Government is also concerned that many workers are highly-indebted, and should not risk their secure jobs by resigning from their work to access their savings.

 

9. Does the new law mean that provident funds will be abolished?

 

The Government recognises the hard-won rights to secure provident funds for workers. Provident funds will continue to exist, but will evolve in the long term to have the same tax treatment of contributions and benefits as pension funds, i.e. a one-third retirement lump sum and a requirement to buy an annuity with the remainder if above R247 500. Current members of provident funds will still be entitled to take their contributions up to 1 March 2016 plus growth (vested rights) as a cash lump sum.

 

10. What are the economic implications of retirement reform?

 

South Africa has had a persistently low savings rate in the last two decades. In 2014, our gross (i.e. household, government and corporate) savings rate stood at about 15% of GDP. The low savings rate is even more pronounced for households, whose savings rate in 2014 stood at 0.1% of GDP. Countries like Brazil, Russia, India and China recorded higher gross savings rates of between 18% and 50% for 2013. Low savings create a shortage of funds for investments, resulting in South Africa having to rely excessively on volatile short-term capital inflows, which can affect the Rand’s purchasing power. Secondly, low savings rate create a funding gap for investments – investments are important for economic development and growth. The National Development Plan acknowledges the importance of higher savings and investments in promoting economic growth in the country.

 

For further information on the law, the media should contact the National Treasury.

 

Issued by: The Presidency, Pretoria

 

 

 

 

 

COSATU strongly condemns the signing of the tax legislation by President Jacob Zuma

 

By Sizwe Pamla, COSATU National Spokesperson

 

The Congress of South African Trade Unions is deeply incensed and disappointed to hear that South African president, Jacob Zuma has now officially signed all the tax legislation from 2015 into law.

 

The president has given a go ahead to the implementation of the 2015 Tax Laws Amendment Act and the Tax Administration Laws Amendment Act meaning that all retirement reforms related to tax harmonisation on retirement contributions and benefits will come into effect on the 1st of March 2016.

 

This is an outrageous and blatant act of provocation by the ANC led government that will have dire and lasting consequences on the relationship between government and the workers.

 

This is not just a slight against the federation and the emasculation and undermining of NEDLAC, but it is an offense against all working people, who have their deferred wages to look forward to after retirement.

 

This disdainful act of provocation by government will get an appropriate and equal response from the workers.

 

Workers will fight any attempts to impose the compulsory preservation of our hard earned deferred wages. We will spare no effort to stop this tyranny; because no government has a right to unilaterally decide for workers, how and when to spend their retirement savings.

 

This point to a state that has appropriated too much power to itself and that does not believe that it is beholden to the people anymore. The workers reject the notion perpetuated by this action that a tiny elite of government bureaucrats and mandarins are better placed to decide and dictate to workers, when and how to spend their deferred salaries.

 

Regardless of the sincerity and noble motives of those, who have nationalised the pensions of the workers without their consent, they are leading us on a slippery slope of government autocracy. We refuse to be coerced into accepting greater government activity and involvement in the affairs of individual workers and also find it deeply disturbing to see government using coercion and force to achieve its purpose, which is outside of its legitimate functions. This is a barefaced perversion of the system, where worker's undeniable rights are considered to be the dispensation of government.

 

These savings are part of worker's hard-earned salaries and should be accessible to the workers, as and when they need them, especially in the absence of a comprehensive social security.

 

This is a disturbing sign that our movement is abandoning the people driven and people centred approach to development. It is unacceptable that when we ask to be given a comprehensive social security and retirement reform discussion paper, which government has failed to deliver for more than ten years, we get given the Taxation Laws Amendment Act; and when we take this process to NEDLAC , where government is represented by the National Treasury , they abandon the engagements to pursue their planned retirement reforms unilaterally.

 

This hard-line approach by the state proves its determination to continue to impose the ineffective and much discredited conservative neoliberal macroeconomic framework. This framework will continue to protract and defend the basic structure of the class system, where resources are skewed towards the ruling classes and state revenue is moved away from taxing the rich and powerful.

 

Neo-liberalism by nature is contradictory. It promotes both political pluralism and authoritarianism on questions of economic policy and management. Neo-liberalism survives and thrives under conditions of low-intensity democracy and insulates political leaders from popular pressure, so that they can drive unpopular economic policies.

 

By signing this act the president has poisoned the relations between the ANC led governments and the workers, he further weakened the alliance and has given considerable comfort to our enemies. This will do nothing to disprove the assertions and suppositions that the movement panders to the left during vote harvesting periods and delivers to the right afterwards. This will complicate the campaigning for the upcoming local government elections because workers will also find it hard to be persuaded to vote against their interests.

 

This issue will be at the top of the list of priorities to be discussed by the upcoming Central Executive Committee {CEC} meeting of the federation next month. The CEC will guide the federation on the rolling out of a massive campaign against this nationalisation of worker's pensions ,as mandated by the 12th National Congress held last year.

 

We demand that both parliament and the president scrap the act and we also reiterate our position that we will never allow this government unilateralism to overrun and erode hard earned workers rights.

 

 

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