Government has launched an attack on retirement funds that could result in significantly reduced benefits for retirement fund members and individuals drifting away from retirement saving vehicles.
And the life assurance industry warned that following the government's decision to increase the tax on the gross interest and net rental income of the funds from 17 to 25 percent that the hardest hit would be low income earners.
Apart from the direct hit it also means that low income earners, who would be paying no tax or a marginal rate lower than 25 percent, are penalised, while high income earners with a marginal rate of 45 percent, get off comparatively lightly.
The blow to low income earners should have been balanced out by a proposal to subsidise pensions of low income fund members, which is still under government consideration.
The industry reacted with both surprise and anger to the increased tax. The industry, including the Institute of Retirement Funds, was not consulted by government about the effects prior to the announcement.
The industry believes that the tax will make retirement funds unattractive to members, particularly of defined contribution funds, and could severely damage the substantial retirement annuity industry.
Sanlam says that those people who switched from defined benefit funds to defined contribution funds have taken a nasty rap for their decision.
The industry is still crunching the numbers to establish the full extent of the damage.
Initial calculations done by Old Mutual Actuaries and Consultants show that retirement fund members could lose up to 25 percent of their final benefits as a result of the tax.
Worst hit will be provident fund members because their contributions to funds are not tax deductible. Consequences for members of defined benefit funds could also be significant if employers refuse to make up any shortfall caused by the tax. This would mean members would either have to contribute more or take lower end benefits.
Pre-budget speculation was that the tax rate would increase from 17 percent to 19 percent, in line with the lowest rate of income tax.
Old Mutual Actuaries and Consultants estimate that the effect of this increase will be to reduce fund investment yields by about 0,3 percent a year taking the total yield reduction since the tax was introduced in 1996 to almost one percent a year.
"For members of defined contribution funds, the effect of the rate change is to reduce the retirement capital which a member could expect to accumulate over a working lifetime by around eight percent. Compared with the situation before the tax was introduced, retirement expectations have been reduced by roughly 25 percent."
Jurie Wessels, director of the Life Offices Association, says this should be seen as a tax on pensioners and future pensioners.
"The increase in the levy rate is difficult to understand against a background where the National Retirement Consultative Forum (NRCF) has accepted a recommendation that ad hoc changes should not be made.
"The NRCF's holistic review of the country's retirement funding system is severely undermined by this announcement."