People who go on pension 30 years from now could receive about 10 percent less in retirement benefits as a result of the 17 percent tax placed on interest and rent income of retirement funds by Finance Minister Chris Liebenberg.
The introduction of the tax, and government commitment to treat private sector and public sector pensioners, as well as defined benefit and defined contribution fund members in the same way, is likely to see a significant number of new products come onto the market to encourage alternative forms of savings to top up retirement benefits.
Spokespeople for the retirement industry are adamant that the introduction of the new tax is no reason to opt out of retirement funds - there are still substantial tax benefits to saving through retirement funds.
Garth Griffin, a member of the Katz Commission and a general manager at Old Mutual, said figures showed that someone who earned about R60 000 a year over 20 years had the value of retirement benefits enhanced by about 75 percent before the introduction of the new tax. With the new tax the enhancement would be reduced to about 50 percent.
"If government had announced a 50 percent incentive everyone would have been overjoyed."
Chris Bvsenberg, Sanlam chief consultant: group benefits, said he was convinced a retirement fund would "continue to best meet the specific needs of employees and companies".
Figures worked out by Sanlam show that the tax will reduce average annual investment returns on retirement funds by about 0,8 percent.
The knock-on effect of this will be that your retirement benefits will be about 10 percent less in the long term (20 years) than they would be under the old system.
Bvsenberg said employers will either have to reduce pension benefits or increase their contributions to defined benefit schemes, while people on defined contribution schemes will be down about 10 percent on their benefits in the longer term
Bvsenberg said it was important that Liebenberg confirmed as permanent a concession given to people already on pension. The concession is that the new tax would not apply to income on their retirement capital.
He warned that if there was a fear the 17 percent tax could be extended to the funds of people who retire after March 1 1997, they would retire early in an attempt to ensure they were not caught in the net in spite of Liebenberg's assurances regarding protection of the tax concessions on lump sums.
If the tax was extended to the retirement capital of people already on pension, the result would be to reduce the value of retirement benefits by 15 percent.
Target date for a number of other changes in taxation of retirement funds and benefits is March 1 next year, but Liebenberg has given an assurance that pensioners will not lose existing rights.
Apart from not taxing the income on the funds of pensioners, Liebenberg has told civil servants that tax on the lump sum payments (currently all tax free for civil servants) would be worked out proportionally.
In other words, the benefits will be divided into the lump sum accrued before March 1, 1997 and the amount accrued after March 1 next year, with only the second portion attracting tax.
The same protection will apply to private-sector lump sum beneficiaries when the new taxation formula for the taxation of lump sums proposed by the Katz Commission is introduced.
The formula will result in a harsher treatment of lump sums to encourage people to take monthly pensions.