Pros And Cons Of The New Tax Law On Pension Payouts

PRESIDENT Jacob Zuma has signed the Taxation Amendment Act into law, bringing about changes to South African legislation governing pension funds.

From March 1, members of a pension fund are entitled to get only a third of the total benefit in a cash lump sum, with the other two thirds to be paid out in a form of a pension over the rest of their lives.

While one cannot argue that there are disadvantages to members receiving all of their benefits in a lump sum — such as spending the money quickly and not investing it in a vehicle that would yield a financial return, so that they end up depending on the government for a state pension for the rest of their lives — one can also argue that the decision to amend the pension fund laws also poses the risk of denying retired individuals the right to participate meaningfully in the economy, such as creating and accumulating wealth for themselves. This may be something towards which they have worked all their lives.

First, let us consider an employee who has worked for 15 years with a plan to start a small business upon his or her retirement. The business may be related to the work and skills the person has acquired during their working life. Such experience, including the relevant business principles, is necessary for the viability and survival of an enterprise.

ALSO READ  Here are Top 10 Grooming Don’ts All Guys Should Know

Let us also consider a person who plans to use a lump sum payout to buy a house, a plot of land or livestock, another form of wealth creation.

What of an employee who has a mortgage on his residential property equivalent to more than a third of the total retirement benefit? The plan of this individual may be to pay off his or her mortgage upon retirement.

The new pension fund law may very well not only result in this retired employee’s house being repossessed, but could also deny a potential entrepreneur an opportunity to establish a financially-viable business and an opportunity to create employment for others.

While I am not entirely against the regulation of pension payouts, I am nevertheless of the firm view that a blanket system should not be applied without exemptions, as is currently the case.

I also believe strongly that the government has failed to apply its mind properly to the effect this piece of legislation will have on the greater working force of SA, particularly those who live below the middle-class band.

I am of the view that an acceptable approach to the introduction of the pension fund legislation would be to make provision for a commission or body to which applications could be made motivating for payments above the prescribed one third.

An example of such an application might be from a person who is due to resign from a job and has a financially viable business idea for which he or she has not been able to get funding from financing institutions.

Instead of being deprived of the opportunity to create equity and accumulate wealth, as well as employment for others, this individual should at least be able to make representations to the commission. The commission would assess such applications on their merits and rule on whether the exemption should be allowed.

The question readers might ask is how this body would be funded. Well, most employees are taxpayers through the pay-as-you-earn system, and the current state pensions are subsidies derived from this form of tax.

While the government’s decision to change pension fund laws might have come from the right place, caution needs to be exercised to ensure that efforts to reduce dependence on the state pension system by retired individuals do not result in the unintended consequence of infringing on people’s right to participate meaningfully in the economy.

source: businessdaylive

You Might Also Like