IRF DAILY
Monday,20 June 2011
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IN THE NEWS TODAY
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LOCAL NEWS
Investment: You need a bigger nest egg these days
If you are a member of a defined contribution pension scheme, you should increase your contributions to avoid retiring without enough money.
That's the advice from financial services advisory group Alexander Forbes.
Defined contribution is where an employee pays a regular amount towards a retirement income savings account, but the benefits on retirement are not guaranteed and depend on how well the pension fund has invested your money. Most South Africans who contribute to pensions are on a defined contribution plan - but the financial crisis has revealed its risks.
The commonly held view is that people should be able to retire with enough money to earn 75% of what they used to earn a year. This has to sustain them for the rest of their lives. John Anderson, head of consulting at Alexander Forbes, says savers who were on track to achieve this target 10 years ago, can now only expect to achieve a target of between 63% and 69% of their previous salary, depending on their age and circumstances - because the cost of retiring has gone up, yet they're still contributing at the same level.
The capital needed to retire has gone up - people are living longer, and investment returns have come down.
Based on calculations of the rising costs of retirement, South Africans could lose between 8% and 16% of their required retirement income over the past decade. They need to save an additional 6% to 8% of salary a year to make up the shortfall.
Anderson says people will have to work longer and save more to be able to retire safely.
"In the next 20 to 50 years, we expect to see a lot more increases in the cost of retirement as we see the impact of lower real returns and increased longevity take effect.
"People haven't increased their contributions to retirement to offset rising costs."
Under the old system of defined benefits, contribution increases took place automatically with employers covering the costs. But in the late 1990s, many companies converted from defined benefits to defined contribution arrangements.
You can achieve the same level of income under both arrangements - the difference is that in a defined contribution scheme it is up to the individual to ensure the target is achieved. Because they offer more certainty, defined benefits are quite attractive - but very few employers are prepared to cover that risk on their balance sheet, says Anderson.
Anderson says people need to manage their risks more actively. This means they might have to increase contributions and possibly retire later. He says employers and trustees can help by making use of more flexible benefit structures.
"There's already a deficiency of retirement savings. If things continue like this, that 30% currently being achieved will be even lower. Full Report:
Business Times Live
18 June 2011
Ex-workers take Transnet to court over pensions
Hundreds of former Transnet employees are suing the parastatal after allegedly being short-changed by the pension fund following their retrenchments between 1996 and 1999.
At the time, an actuarial study showed the pension fund was 11% underfunded, prompting an actuarial recommendation that all cash payouts from the fund be cut by 11%. The pensioners are now claiming this 11%, interest of 15.5% a year and legal costs from the Transnet Pension Fund, the Transnet Second Defined Benefit Fund and the Transnet Retirement Fund.
Cape Town-based Hendrik Birkholtz is spearheading the class action following a ruling in 2006 in a similar case that the Transnet pension fund make payments to 1800 pensioners, the so-called Transnet Action Group (TAG).
A confidential settlement was reached between Transnet and the TAG, with Transnet reportedly paying R82-million to cover the shortfall. When Birkholtz heard of the TAG case in 2007 he tried to claim money from the fund but was told he needed to be part of the class action to benefit.
"When I left Transnet, I had the option of a lump-sum cash payout or cash and a monthly pension. I chose the lump-sum payout - in retrospect a great decision given the meagre 2% increases Transnet's pensioners receive annually," said Birkholtz, a former rolling stock manager.
"I decided to start a new class action because there are thousands of former Transnet employees, many of whom are struggling to survive, across the country who are entitled to that 11%."
According to Birkholtz the cost to the pension fund, should the court find in favour of the more than 600 plaintiffs, is more than R20-million.
Judgment is expected in the next two months, but Transnet employees can still join the class action, said Birkholtz.
The plaintiffs argue in court documents that the deficit was partly due to monies owed to the fund by Transnet, or the government as a guarantor of Transnet's debt, following the transfer of all assets of SA Transport Services (SATS), including the underfunded SATS funds, to Transnet in 1990.
At the time, R17.1-billion was owed to the Transnet pension fund, but only R10-billion was paid by Transnet, the documents show. The shortfall on the fund due to the unpaid debt on March 31 1996 was at least R3.2-billion.
"Had the balance of the debt been taken into account, the fund would have been at least 100% funded," say the papers. Other arguments include that Transnet is obligated by law to fund any shortfalls, and that the fund was not allowed to discriminate between the 1800 TAG members, who got a top-up, and other members.
Peet Maritz, principal officer of the Transnet pension fund, said the payments were made in line with the rules of the fund, and were based on the fund's funding levels
Business Times Live
18 June 2011
By JANA MARAIS
New tax credits for medical scheme members
A proposed system of tax credits for medical scheme contributions could make scheme membership more affordable for people who earn less than R235 000 a year, a discussion document released by the National Treasury this week shows.
The proposed system, which is to be implemented next year, will benefit these members at the expense of higher-income earners. It will also reduce the government’s tax take. In addition, the discussion document suggests a consultation pro-cess to explore the possibility that the tax credit system be extended to tax deductions for out-of-pocket medical expenses. The National Treasury says such a move will adversely affect only higher-earning pensioners and higher-income families with members who are disabled.
The proposals to change the tax deduction (an amount set off against your taxable income) for your medical scheme contributions to a tax credit (an amount set off against your tax) from March next year are contained in the draft Taxation Laws Amendment Bill, which was released earlier this month.
The discussion document contains details of the effects of these proposals, as well as proposals to change the deductions allowed for out-of-pocket medical expenses to tax credits from 2015.
In addition to discussing how the tax credit system will redistribute the tax relief for medical scheme contributors, the document shows that the system will cost the government almost a billion rand more than its current system.
The National Treasury estimates that in the 2008/9 tax year the government forfeited R15.7 billion in tax by allowing you to deduct your medical scheme contributions and medical expenses from your taxable income. If the proposed tax credit system had been in place, it would have spent R16.6 billion.
The rand amounts that you can deduct from your taxable income for medical scheme contributions benefit you by saving your paying tax at your highest marginal tax rate. The consequence of this system is that higher-income earners benefit more than lower-income earners.
The document says the current deductions for medical scheme contributions are unfair, because they depend on income, and the tax system should not contribute more to your medical expenditure on the basis of higher income.
The proposed tax credits will be set at the rand amount you would enjoy as a tax benefit from the current deductions if you were on a marginal tax rate of 30 percent. The discussion document says this will provide tax relief that is equitable across income groups.
The marginal tax rate of 30 percent applies to earnings of between R235 000 and R325 000 a year.
Anyone who earns less than R235 000 a year should benefit from the tax credit system, whereas those who earn more than R325 000 are likely to see an increase in their tax liability from March next year.
In its discussion document, the treasury says estimates indicate that it is providing tax benefits equivalent to an average of 22 percent of the current capped amounts, and setting the tax credit at the 30-percent tax rate should benefit most taxpayers.
Currently, taxpayers aged 65 and over, as well as those who have a disabled family member, can deduct all their medical scheme contributions and all qualifying unrecovered medical expenses (those not paid by a scheme) from their taxable incomes.
Both these groups of taxpayers should still be able to deduct all their expenses and most of their contributions from March next year, despite the proposed introduction of an additional tax credit for these taxpayers, Ismail Momoniat, the director of tax policy at the treasury, says. The treasury will in any case finalise its proposals only after public consultation, he says.
The discussion document says that the shift to tax credits will facilitate the transition of medical schemes into a national health insurance (NHI) framework, because the contribution from the tax system will be equitable, limited and likely to be in line with, or less than, the insurance costs per person under NHI.
The document says tax relief for medical scheme contributions over and above the NHI costs and out-of-pocket medical expenses is likely to fall away under NHI, although there may be a phasing-out period.
The discussion document says that it is not administratively possible to pay the tax credit to scheme members who are below the tax threshold or who qualify for credits that exceed their tax liability. However, it says, the credits could be extended to these people once a proposed risk equalisation fund is in place as part of the NHI reforms.
The deadlines for public comment are July 22 for the draft legislation proposals for 2012 and October 31 for the discussion document proposals. The documents are available at
CURRENT MEDICAL DEDUCTION SYSTEM
This tax year (2011/12) you are entitled to deduct from your taxable income R720 a month each for yourself, as the main medical scheme member, and for the first dependant you register on your scheme. You are entitled to deduct R440 a month for each additional dependant.
If your employer pays all or part of your medical scheme contributions, this deduction will offset that subsidy, which is included in your income as a taxable fringe benefit.
If you do not receive a subsidy or you receive a subsidy that is less than these rand amounts, the rand amount, or the balance of it, will reduce your taxable income.
If your contributions exceed these amounts, you can claim the excess only if you are over the age of 65 or if you or a family member is disabled.
The tax benefit you receive as a result of the deduction for scheme contributions depends on your marginal tax rate. If your marginal rate is 18 percent (for an annual income of less than R150 000), your tax benefit is 18 percent of the rand amount allowed as a deduction. This amounts to a potential tax benefit of R5 011 for a taxpayer with a family of four registered on a medical scheme.
If your marginal rate is 40 percent (for an annual income of R580 000 or more), your benefit is 40 percent of the rand amounts allowed as a deduction. This amounts to a potential tax benefit of R11 136 for a taxpayer with a family of four on a scheme.
If you are over the age of 65 or if a member of your family is disabled, in addition to being able to deduct all of your medical scheme contributions, you can deduct all of your unrecovered qualifying medical expenses, as well as those of members of your immediate family. Full Report:
Personal Finance
19 June 2011
By Laura du Preez
Boomers’ retirement could be a bust
The retirement of the baby boomer generation, which starts this year, could have far-reaching implications for the global economy and will probably redefine how we think about retirement, an actuary in the retirement industry says.
This year, the first baby boomers will turn 65, Craig Aitchison, the managing director of Old Mutual Actuaries and Consultants, says. Baby boomers is the term used to describe people who were born during a population explosion between 1946 and 1964 in countries that were affected by the Second World War.
Typically, Aitchison says, baby boomers are workaholics who pursue success and have a positive attitude. They have challenged tradition and can adapt to change.
Baby boomers make up a significant proportion of the Western world’s population, Aitchison says.
In general, boomers are well educated and prosperous, and their removal from the ranks of the employed and the taxpaying will have a significant affect on about 28 countries, he says.
In the United States, boomers make up 27 percent of the population and collectively earn about US$2 trillion a year. They control over three-quarters of the assets of that country.
Compounding the problem of their loss to the economic system is the fact that many baby boomers are not well prepared for retirement, and many may come to rely on already overburdened social security systems, Aitchison says.
According to recent report by CNBC, a US poll found one in four baby boomers has saved nothing for retirement. Only one-third of the baby boomer generation is financially well prepared for retirement, Aitchison says.
Despite their relative prosperity, boomers are generally not good at managing money and, as the first generation in history to enjoy the widespread use of credit, they have high levels of debt.
In the US, for example, there are 76 million baby boomers and only 46 million people in the next generation – born between about 1965 and 1980 – known as generation X.
In 1950, there were 16 taxpayers in the US for every one person who drew social security. Last year, the ratio of taxpayers to pensioners fell to 3.3, and by 2025 the ratio is expected to decrease to two taxpayers for every one person on social security, Aitchison says.
The American social security system last year started to pay out more than it collects from current contributors. There is a deficit of about US$3.2 trillion in social security, Aitchison says, and the retirement of the baby boomers is likely to compound this deficit. This is why policymakers are considering reforming the social security system, Aitchison says.
The removal of the baby boomers from the tax system when they retire will also have a big impact on the US economy.
Aitchison says there are estimates that the annual growth of the US’s gross domestic product (GDP) could be reduced by a quarter by the retirement of the baby boomers in that country.
Research shows that your spending peaks when you are in your 50s, he says. McKinsey, a global economic research company, estimates that the retirement and the approaching retirement of the baby boomer generation will lower the US GDP from 3.2 percent to 2.4 percent, and this is likely to have a significant effect on the already struggling US economy, Aitchison says.
However, not everyone agrees that the retirement of the boomers will knock the US economy, he says. Some people that believe that technology will compensate for the boomers’ absence from the workforce; others say the boomers will continue to work in retirement; and others say that immigrants will fill the gap left by the boomers.
In addition to the economic effects of the retirement of the baby boomers, the boomers is the generation that will be most affected by increasing longevity, Aitchison. The baby boomers, in particular, will benefit from longer lives as a result of improvements in medicine and healthier lifestyles.