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Pension Funds
Sunday, February 1, 2004
Making the best of it

Employers and employees are not making the best use of the available tax allowances when considering pension and provident fund contributions, says Maryann Middleton, director at legal firm Deneys Reitz.

“There is no real justification for an employer not to include an employee’s entire remuneration as pensionable emolument for the purposes of calculating the contributions towards pension or provident funds.
‘Remuneration’ is defined as any amount of income that is paid or payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuating allowance, retiring allowance or stipend and includes 50% of the amount of any allowance or advance paid by way of a travelling allowance, and which is not based on the actual distance travelled by the employee.
Historically not all of an employee’s remuneration qualified as a ‘pensionable emolument’. Under a defined benefit fund employers would limit pensionable emoluments to reduce their liability in terms of matching contributions and their ultimate liability to pay the amount of pension due to a retiree.
Under the more recently adopted defined contribution fund model, employees each have their individual accounts to which are credited their own contributions, the net contributions received from their employer and the investment return on those contributions. “The employer has no obligation to underwrite any minimum pension benefit for the employee,” she says, “so he must rely entirely on the accumulation of contributions and a positive investment return in order to secure a comfortable pension at the end of his working life. There is therefore no need for employers to attempt to limit their financial liability.”
Middelton points out that income tax legislation encourages investment for retirement purposes, and there are various tax concessions for investments in approved retirement funds.
There is no limit on the amount that may be paid into a pension fund by a member of the pension fund in terms of the Pension Fund Acts or the Income Tax Act. However the latter limits the amount that may be deducted from taxable income in any year of assessment in respect of contributions to pension funds by individuals to R1 750 or 7,5% of the remuneration earned in that year. “It is therefore in the interests of all employees to consider the amount they should contribute to their pension funds. The higher the employee’s marginal tax rate the greater the benefit of the tax deduction to the employee,” she adds.
The tax deductions for retirement funding for both the employer and employee are:

Pension and Provident Funds — An employee may contribute and receive a deduction for the greater of R1 750 or 7,5% of the remuneration earned from retirement funding employment in respect of contributions to a pension fund. Although no deduction is allowed for employee’s contributions to provident funds, appropriate salary sacrifice arrangements with the employer will achieve the same result.
In terms of the Income Tax Act an employer may deduct from its gross taxable income, contributions (including lump sum payments) made by the employer to a pension or provident fund on behalf of its employees up to an amount equal to 10% of the remuneration of each employee for the year of assessment. If the employer’s contributions exceed 10% the employer has to justify such payment to the Commissioner of Inland Revenue.

Retirement Annuity Funds — A retirement annuity fund does not require an employment contract. Individuals normally contribute to retirement annuity funds to ‘top-up’ their retirement benefits.
Individuals will receive a deduction of the greater of 15% of non-retirement-funding taxable income, or R3 500 less allowable pension fund contributions or R1750.
An employer will not receive a tax deduction for any contribution made by it to an RA on behalf of its employees.

Copyright © Insurance Times and Investments® Vol:17.1 1st February, 2004
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