Impact on Retirement Funding and Healthcare

By Leslie Primo from Aon Employee Benefits

[25 Feb 2016] On the whole the 2016 Budget speech placed much emphasis on the need to foster economic growth. It also focused on fiscal consolidation, aimed at stabilising debt as a percentage of gross domestic product (GDP) by means of more ambitious budget deficit targets, reduced spending plans and tax increases.

With regard to the retirement fund industry and healthcare, the highlights can be summarised briefly as follows:

Retirement Funding

• - The Minister emphasised Government’s policy commitment of achieving universal health coverage and comprehensive social security, which form part of the National Development Plan. Whilst acknowledging the complexity of retirement and social security reform, given that existing arrangements create long-term obligations, he nonetheless affirmed Government’s willingness to confront these challenges.
• - The Ministers of Finance and Social Development will be jointly responsible for the social security reform programme, which has to draw on both international best practice and interdepartmental work of recent years.
• - Tighter regulation of the retirement fund industry is part of the broader social security reform effort. The intention is ultimately to protect members’ interest and ensure that funds are not dissipated by unnecessary administration and financial costs, and that an income in retirement is assured. In this regard National Treasury has issued a number of technical papers over the last few years, which dealt with inter alia the level of costs and charges in the retirement fund industry. National Treasury’s engagements with stakeholders (including industry) will continue this year.
• - The Minister again assured public servants that the reform of the retirement system will not affect their accrued pension rights, notably in the Government Employees Pension Fund.
• - As was expected, the Minister introduced the Revenue Laws Amendment Bill 2016 to give effect to Government’s decision, announced on 18 February 2016, to postpone the annuitisation requirement for provident fund members for two years until 1 March 2018 to allow for further consultation with key stakeholders.
• - All other provisions legislated in the 2015 Taxation Laws Amendment Act (the so-called T-day changes) in respect of all retirement funds, and all other tax laws will continue to be implemented from 1 March 2016. These include, amongst others:
• -- The tax deduction for contributions to all retirement funds (including provident funds) will increase to 27.5% of the greater of taxable income or remuneration, up to a maximum of R350 000 per year.
• -- The minimum threshold (de minimis amount) required for annuitisation for pension and retirement annuity funds will still be increased from R75 000 to R247 500.

 Revenue Laws Amendment Bill 2016

• - The purpose of the Revenue Laws Amendment Bill 2016 (‘the Bill’) is to amend certain provisions of the 2013, 2014 and 2015 Taxation Laws Amendment Acts in order to provide for
• (a) the postponement of certain provisions in respect of taxation of retirement benefits and
• (b) a correction of the calculation of the amount of a deduction to be included in taxable income in respect of deductible contributions to defined benefit retirement funds.

• - The amendments proposed in the Bill include the following:
• (a) Postponement of the annuitisation requirement for provident funds for two years, until 1 March 2018.  Contributions made by provident fund members to their funds before 1 March 2018 will not require annuitisation.
• (b) A correction of the value of the fringe benefit in respect of employer contributions to defined benefit retirement funds that must be deemed to be an employee contribution.  It provides that the deemed employee contribution will be equal to the value of the fringe benefit under paragraph 12D of the Seventh Schedule to the Income Tax Act, even if such value is greater than the actual contribution paid by the employer.
• (c) Postponement of the inclusion of the compulsory annuity paid by a provident fund or a provident preservation fund from the definition of the term ‘compulsory annuity’ in section 10C of the Income Tax Act, until 1 March 2018.
• (d) Postponement of a tax free transfer from a pension fund to a provident fund, until 1 March 2018.

Healthcare

• - The Minister of Health has published the White Paper on National Health Insurance (NHI) and proposals for comprehensive social security will be released by June 2016.  He has further emphasised that public health service delivery improvements must be prioritised and reform of the private health and medical scheme environment is needed.
• - In order to progress the White paper’s proposals, National Treasury will shortly release further details on financing aspects.
• - Tax credits on medical scheme contributions have been increased by 6% to:
  • -- R286 each for the individual who paid the contributions and the first dependant on the medical scheme and
  • -- R192 for each additional dependant