Retirement reform and non-retirement tax free savings

National Treasury published papers providing details on the proposed retirement reforms and tax free savings products as announced in the budget speech 2014.

The two documents follow on the initial overview document on retirement reform, titled “Strengthening Retirement Savings: Overview of the 2012 Budget Proposals” (May 2012). The documents are also consistent with the shift towards a Twin Peaks system of regulating the financial sector, as initiated by the publication of the document titled “A safer financial sector to serve South Africa better” (February 2011). National Treasury claims in particular, to ensure that customers or members of retirement funds are treated fairly at all times, including after they retire.

1) 2014 Budget update on retirement reforms

This document provides more details on the retirement reform announcements made by the Minister of Finance in his 2014 Budget Speech. The document proposes a range of measures to lowering costs, built on a foundation of a mandatory contribution system, optimal preservation, consolidation, and further outlines short, medium and long term reforms in the retirement industry. Additionally, this document summarises the process of retirement reform from 2011 until the present, and lays out a future direction for the implementation of reforms over the next few years.

The broad policy goals of the intended reforms are:

• Implementing auto-enrolment or a mandatory contribution system
• Improving preservation
• Improving fund disclosure
• Getting defaults right
• Consolidating funds
• Simplifying retirement savings products and making them portable between providers
• Ensuring effective intermediation
• Providing tougher market conduct regulation and more effective supervision

This document (read with the policy paper titled “2013 Retirement reform proposals for further consultation”) will form the basis for engaging with key stakeholders (trade unions, trustees, employers, industry).

Any new or further comments on this paper can be submitted by 30 April 2014 to Ms. Alvinah Thela, Director: Retirement Funds by email to [email protected] or per facsimile to (012) 315 5206.

Find the document here: [2014 Budget Update on Retirement Reforms]

2) Non-retirement savings: tax free savings accounts

This document provides more details on the non-retirement savings reform announcements made by the Minister of Finance in his 2014 Budget Speech and the Budget Review. This document lays the basis for the legislation that will be published for public comment by July 2014, and for tabling and enactment thereafter in the newly-elected Parliament before the end of the year. This document incorporates revisions to the original proposal based on comments received and from subsequent consultations. It also provides an outline of the administrative requirements and procedures for these accounts.

The revised proposal now retains the current interest income exemptions, but it is not intended that the exemptions increase with inflation. This approach should allow a sufficient time for individuals to restructure their financial affairs. Individuals will be allowed to open one or two accounts, where they may invest in either interest bearing or equity instruments or both types of investments in each account, but total contributions for the tax year may not exceed the annual limit, initially to be R30 000. Unnecessary withdrawals will be discouraged by not permitting replacement of withdrawn amounts. A lifetime limit of R500 000 will also apply.

Not all market savings or investment products may be appropriate for inclusion in these tax free savings accounts. Products with contractual periodic contribution obligations (such as insurance contracts) or excessively high early termination charges are not considered appropriate. National Treasury and FSB will engage with industry in determining a reasonable early termination charge.

This document seeks to outline a set of principles and characteristics that products should abide by. These include simplicity, transparency and suitability. Direct share purchases will not be allowed although most exchange traded funds (ETFs) will qualify.

Comments on the paper Non-retirement savings: tax free savings accounts may be submitted by 30 April 2014, to Mr Chris Axelson, Director: Personal Income Taxes and Savings, Economic Tax Analysis, Private Bag X115, Pretoria, 0001 or by fax to 012 315 5516 or by email to: [email protected].

Find the document here: [2014 Tax free Savings Accounts]