The confirmation of the rollout for government’s plan to give pension fund members early access to their retirement savings will be one of the most anticipated topics of this year’s Budget Speech but Finance Minister Enoch Godongwana must err on the side of caution to maintain tax system stability and avoid creating unrealistic expectations for indebted consumers.
This is according to Michelle Acton, Key Account Manager at Old Mutual Corporate who says that while industry welcomes the proposed reforms, Godongwana is under extreme pressure from weary consumers to deliver on the reforms almost immediately.
The current tax treatment of retirement savings is based on contributions being tax exempt; growth within the retirement vehicle being tax exempt; and then the benefits being taxed. The proposals deal quite extensively with the shortcomings of this existing tax treatment in relation to the two-pot system and suggests four alternative proposals.
“We would prefer if the tax system does not change as the extent of the pension fund reforms and requirement for fund administrators are already substantial,” said Acton. “Currently the tax implications around retirement funding are well established and understood. It would be wise not to add another layer of complexity and instead maintain the current stability and integrity.”
Acton notes that while it is unlikely that a rollout plan will be detailed in the budget speech, Old Mutual expects Godongwana to give the reforms the greenlight and subsequently, assurances that government would take into account the time required by industry to comply with the legislation.
Acton says it is also important that Godongwana makes pension fund members aware that if the two-pot system is given the green light, it will still take some time to get the required legislation passed, and the current administration systems updated to allow for this new system.
“We know that many consumers are experiencing financial distress and are looking forward to accessing a small portion of their pension savings for relief. We support granting consumers early access to a part of their retirement funds, as an element of the new two-pot system and we are committed to making this happen with a measured approach that does not jeopardise their retirement savings outcomes.”
Acton emphasises that while many will be hoping to access a substantial portion of their retirement savings, realistically that access will be conservative – the proposal is referring to 10% of accumulated savings up to a cap of R25 000. She says the amount of money that members are allowed to access must take in to account the stability and liquidity requirements of funds and the markets.
Acton notes that since the release of the draft proposals in December, the industry stakeholders have put considerable effort into to assessing the proposed reforms and giving constructive thought into the responses to National Treasury which could ensure the transition can be effected efficiently and effectively.
“Across the industry there have been a considerable number of fruitful engagements, and every stakeholder is committed to making these reforms work in the best interest of South Africans.
As Old Mutual, we support whole-heartedly National Treasury’s view that the introduction of preservation of contributions is necessary to ensure sufficient retirement provision to avoid old-age poverty and to end reliance on the state,” concludes Acton.