Pension Reform and Financial Markets: Encouraging Households Savings for Retirement
Liberty retirement fund reform
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Transcript of Liberty retirement fund reform
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Update: Retirement Fund Reform
Geraldine Macpherson
Legal marketing specialist Gauteng
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NT’s technical discussion papers
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Compulsory preservation
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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
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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.
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Basic premises
• Retirement funds must “nudge” members into preservation:
• Eg default preservation fund
• Could consider making fund membership compulsory for all employees
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Basic premises
• Withdrawal mechanism on retrenchment could be extended to RAs and Preservation funds
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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
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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)
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Provident and Pension fund alignment
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Overall acknowledgment
• Many trustees lack knowledge, skill and expertise required to perform their duties
• Will introduce mandatory regular training
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Enabling a better income at retirement
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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
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Types of Annuities
Life Annuity (Conventional Annuity) Living Annuity
Guaranteed income for life Risk of longevity
No investment risk Investment risk
Fixed draw down Variable draw down
No ongoing advice High advice
Relatively well costed, CPI linked annuities a possible concern
High costs, layered costs
May only be sold by registered life insurance companies
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Stats
Size of the Annuities market
2003 R8 billion
2011 R31 billion plus
Types of annuities sold
2003 50% Life annuities
2011 14% life annuities
Average drawdown is 7.5% plus charges = 10%
2 out 3 chance that income will drop by 30% in real terms while alive
Average drawdown is 7.5% plus charges = 10%
2 out 3 chance that income will drop by 30% in real terms while alive
Commission on a LA up to 10 x higher than life
annuityOnly 10% of
policies sold by brokers are life
annuities
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NT’s challenge
• Considering ways to:
• Reduce the cost of living annuities and
• Reduce the level of financial advice required
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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)
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Increased assistance to retirees
• Fund to have a default retirement income product
• Member may opt out of the default
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Improving tax incentives for retirement savings
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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
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Employer may deduct between 10% and 20% of approved remuneration of employee as a business expense. These contributions do not form part of
the employee’s taxable income!
Employer may deduct between 10% and 20% of approved remuneration of employee as a business expense. These contributions do not form part of
the employee’s taxable income!
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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
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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
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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.
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Incentivising non retirement savings
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Incentivising non retirement savings
• Focus is on low to medium income earners
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• Current:
• Interest exemption
• BUT not visible enough and
• Restricts investment choice to interest bearing accounts
• Proposed
• Scrap interest exemption
• Tax incentivised savings vehicles
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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
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What will it be?
• 2 options:
Interest bearing accounts which may invest in bank deposits, Retail savings bonds or interest bearing CIS s such as money market funds
OR
Equity accounts which may invest in CIS s that hold JSE listed equities or which directly own property
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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!
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Thank you
31
In formulating the information in this document, Liberty has taken due care to ensure that the views and opinions are based on information which is relevant and accurate. While every care has been taken before opinions and views are given, no representation, warranty or undertaking (expressed or implied) is given and no responsibility or liability is accepted by Liberty as to the accuracy of the information contained herein. Any recommendations made must take into account your clients specific needs and personal circumstances. Any legal, technical or product information contained in this document is not to be construed as advice by Liberty. Liberty Group Ltd is an Authorised Financial Services Provider in terms of the FAIS Act ( no. 2409)