State to close provident fund tax loophole

National Treasury says it continues to hold the view that taxpayers who receive an upfront deduction for contributions to provident funds should be required to annuitise two-thirds of the money at retirement.

Provident fund members can access their savings as a cash lump sum at retirement. But pension fund and retirement annuity investors are required to agree – after deciding if they want a partial lump sum payment – to a payment schedule of monthly amounts out of the balance that lasts until death.

Whole benefit

This follows government postponing the annuitisation of provident fund benefits – that was to be implemented on March 1 – by two more years to allow for further consultation.

Trade union federation Cosatu has been vocal in its opposition to the change, particularly since the long-awaited paper on social security reform has not been published.

The postponement divorced the tax incentive from the policy objective, as provident fund members currently get an upfront tax deduction for their contribution, despite being able access their whole benefit as a cash lump sum at retirement.

Compulsory annuitisation is part of a broader set of retirement reforms that aim to improve retirement outcomes for South Africans. Data suggests the majority of South Africans can’t retire comfortably. At the same time, the country’s low savings rate means it is dependent on foreign capital to finance infrastructure development.

Addressing delegates at the 2016 Tax Indaba, Chris Axelson, director of personal income taxes and saving at National Treasury, said a tax deduction was money that was forgone by the fiscus and therefore it needed to be effective.

“We are not just going to give it away for nothing. We think if there is a deduction, the quid pro quo is then you have got to annuitise two-thirds.”

Provident fund members receive a tax deduction, although they aren’t required to annuitise. But this has to be sorted out in the next two years or alternatives have to be presented, he argued.

“We are in a little bit of limbo at the moment, but it is very much on the top of our minds.”

When asked whether the release of the social security paper would help address union concerns around compulsory annuitisation, Axelson was hesitant: “I can’t say.”

He said the absence of the paper has been a barrier. National Treasury has been accused of dealing with the reforms in a piecemeal fashion and it’s been suggested that it should look at the social security system in its entirety.

Holistic perspective

“I think it could really help if it is out because then people can see what the view is for the whole system and we can debate once more the smaller issues. I think it can only help if it does get released.” Axelson said National Treasury had been working with the department of social development on the paper. “We are very close [to releasing it].”