Retirement Savings Changes – Impact on Payroll

Retirement Savings Changes – Impact on Payroll

Legislation, Payroll / eTorQue

The changes to the treatment of retirement savings have been in the market for a while. However, now they are really here, please don’t underestimate the impact they may have both practically in payroll changes you need to have ready for March 2016, but also in creating uncertainty amongst employees (fear of the unknown). In this post we summarise the changes and their likely impact on both employers and employees.

Summary of changes – impact on Employers and Employees:

In the Taxation Laws Amendment Act, 2015, some of the Government’s retirement reform proposals first tabled in 2013, were passed into law. The new rules aim to bring into line the tax treatment and annuitisation requirements for all types of retirement funds (pension, provident and retirement annuity funds).

At a very high level the changes can be summarised as follows and are effective from 1 March 2016:

  Impact on Employee or
Impact on Employer
Retirement funds covered Applies to all retirement savings – pension (defined benefit and defined contribution), provident and retirement annuities. Applies to all retirement savings – pension (defined benefit and defined contribution), provident and retirement annuities.
Tax deduction May deduct 27.5% (of greater of their remuneration or taxable income) of both their employer’s and their own contributions to all types of retirement funds subject to a cap of R350,000 per annum. Employer must include employer contribution as a fringe benefit in their payroll subject to the allowed deduction and cap.
On retirement Required to take two-thirds of their retirement savings as an annuity.  
De Minimis on retirement Portion of retirement savings below threshold of R247,500 can be taken in full as a lump sum.  
Existing provident funds – transition rules Only applies to contributions post 1/3/16 and for taxpayers younger than 55. The rules will therefore not apply to provident fund balances at 29 February 2016 or the future returns on these balances.  
Claiming contributions Employee can claim employer and employee contributions (subject to deduction rules). The employer will be allowed a full deduction of the total of all employer-paid contributions to retirement funds as long as the fringe benefit is raised. Note that the deduction limit has fallen away.
Unutilised contributions Contributions in excess of the lesser of the percentage or the monetary cap will be carried forward into the following tax year for deduction in that year subject to the limits applicable for that year and, if not fully deductible in that year, the excess will again be rolled forward again to the next year.  
Defined contribution   Employee fringe benefit component equals amount actually contributed to employee’s scheme.
Defined benefit   The retirement interest value is calculated according to a formula, and therefore, in order to determine a fair value to the employee, the fringe benefit value must also be calculated according to a formula.

Some further comments on the above:

  • Basing the 27.5% deduction calculation on the greater of remuneration or taxable income is a smart move by the legislators. It means that payrolls can calculate the deduction on the remuneration value in the payroll without too much fear of it being reduced on assessment.
  • Contributions to provident funds for February 2016 should be paid before 1/3/16 so they can be excluded (per the transition rules) and taken as a lump sum on retirement.

From an employer perspective, the amendment will have several implications:

  1. Payroll – changes need to be made to your payroll setup and calculations as from 1 March 2016. In short, all employer contributions made to Pension, Provident and Retirement funds will become taxable fringe benefits.
  2. The fringe benefit is deemed to be a contribution paid by the employee and is included in their remuneration as defined. This has knock on consequences:
    1. The Skills Development and UIF calculations need to be amended in the payroll to include the new fringe benefit amount;
    2. It is important that the payroll is set up correctly in terms of the definition of remuneration (as defined in the fourth schedule) for the purposes of calculating the 27.5% percentage cap amount;
  3. Information – International experience has shown that big pension legislation changes often catch Fund Managers/Administrators on the back foot particularly when it comes to the necessary system changes required to provide new information in the right format. It is therefore highly recommended you engage early to source the required information to process your March 2016 payroll. Don’t forget to then send it to your HRTorQue payroll consultant.
    1. The types of information you will need include (not an exhaustive list):
      1. Fund Name and Clearance Number;
      2. Type of fund (Retirement Annuity / Pension/ Provident)
      3. Contribution percentages (Employee and Employer)
      4. Confirmation of the income on which the contributions are based
      5. Fund Admin Fees (Employee and Employer) (and whether included in the fund contributions above);
      6. Risk Benefit Information (and whether Approved / Unapproved)
      7. Confirmation as to whether it is a Defined Contribution (DC) fund or a Defined Benefit (DB) fund
      8. Click here to download a questionnaire you can use (Source: NGA Africa).
  4. Employee education – retirement savings are an emotive topic and are often complex to explain. Particularly with the recent negative publicity around the changes employees may feel stressed about the potential impact of the changes on their personal savings and ability to retire. The changes will also potentially impact their take home pay in March 2016. We would recommend communicating to employees the impact of the changes and in the best scenario, arranging training for all employees on the changes.
  5. Employment contracts – you may have designed your employment contracts and retirement contributions on the basis of historic rules and wish to consider making changes in light of the new rules.

If you require assistance gathering information, training employees or making changes or starting a process to make changes to employment contracts and would prefer a consultation with your payroll consultant and/or one of our consultants, please let us know and we can set up the meetings.