You would have more cash in your pocket when you retire under a pension fund rather than a provident fund if certain proposals suggested by the Katz Commission are implemented.
Jacqui Segal, head: investment products at M3 Capital says Katz has made several suggestions regarding the way retirement benefits should be taxed.
He recommended that if his proposals were accepted they be implemented in their entirety.
The proposals include:
* All retirement funds should be taxed and treated in the same way. Presently you are taxed differently if you are in a pension fund, provident fund or retirement annuity.
* Katz wants to increase the cap on the tax-free contributions that you and your employer can make to a retirement fund or that you can make to a retirement annuity if that is your only fund. He suggests that you be allowed to deduct from your taxable income 7,5 percent of your contributions to any retirement vehicle and that your employer be allowed to deduct 15 percent.
At present your employer can deduct up to 20 percent and you can claim 7,5 percent of your contributions to a pension fund and nothing if you belong to a provident fund. If you are self-employed, Katz says you should be able to deduct 22,5 percent. At present you can only deduct 15 percent of contributions to a retirement annuity.
* All benefits, including deferred compensation and accumulated leave, should be added to your retirement payout and taxed at retirement.
At present these benefits are taxed separately from your retirement money. The first R30 000 of this benefit is tax free and the balance is taxed at your average rate over the past two years. This means that you get the first R120 000 of your retirement money tax free plus R30 000 of any deferred compensation, leave or other benefit that is paid out when you end your employment.
* Choice of lump sum or annuity. Katz is proposing that if your retirement benefit is more than R50 000, you be given the choice of an annual pension or a lump sum on retirement or a combination of the two. But the structure of the tax that Katz is proposing is aimed at encouraging you to choose an annuity rather than the lump sum.
The annuity will be tax free but the underlying investments in the annuity fund would be taxed.
If your retirement benefit is under R50 000, you would be restricted to taking it all in cash and this would be tax free if the Katz proposals are implemented.
* Tax should be collected from retirement funds not individuals. Katz has suggested that when you are due to retire you are taxed there and then rather than during your retirement. This will shift the responsibility for collecting the tax from the individual to the retirement fund.
You will be more favourably taxed on the lump sum if you elect to take an annuity than if you elect to take your entire retirement benefit in cash. But you will be taxed once, and that is on retirement.
When your annuity is paid it will be tax free as it will have been taxed in the hands of the retirement fund.
The structure of the tax that Katz is proposing is:
Tax-free Amount
* On the full lump sum:
The first R50 000 is tax free.
* On an annuity:
If the amount that you will be taking as an annuity is greater than R50 000, but less than R120 000, you will get R120 000 tax free.
If the annuity is more than R120 000 then 50 percent of the amount between R120 000 and R210 000 will be tax free. This is subject to an overall limit on the capital sum that you choose.
So if you buy an annuity of R540 000, R380 000 of that will be tax free if Katz's proposal is implemented.
This is the incentive for you to take the annuity instead of a lump sum.
At present you can only take a tax free sum of R120 000 or an amount equal to R4 500 times number of years of service.
Tax on Taxable Amount
Katz is suggesting that the taxable portion be taxed according to a progressive scale:
TAX RATEAMOUNT
15% Less than R150 000
25%R150 000 to R450 000
35%R450 000 to R750 000
45%More than R750 000
The progressive rate is very different from the way that you are taxed on lump sums at present.
Currently the taxable portion of the lump sum is taxed at the higher of your average tax rate in the year you retire or the rate of tax you were paying over the two years up to retirement.
This progressive rate system prevents manipulation of your average rate and limits tax planning opportunities, Segal says.