1. Taxation Laws Amendment Bills, 2007 (Retirement Lump Sum Payouts) Informal Hearings 13 March 2007

2. Retirement Funding Basics

3. 3 Three Basic Types of Retirement Funds Pension Funds (Employment Plans) –Example: Private sector –Example: GEPF Provident Funds (Employment Plans) –Example: Unions Retirement Annuity Funds (Individual) –Example: Contractual savings

4. 4 Three Retirement Stages Stage #1: Contributions Stage #2: Fund Growth Stage #3: Withdrawals –Lump sum payouts –Conversion to annuities Guaranteed annuities Living Annuities

5. 5 Contributions: No Change Pension Funds –Employee contributions are deductible up to 7,5 of employee salary –Employer contributions are deductible up to 20% of employee salary Provident Funds –No deductions for employee contributions –Employer contributions are deductible up to 20% of employee salary Individual Retirement Annuity Funds –Member contributions are deductible up to 15% of contributions (after set offs for employment contributions)

6. 6 Growth: Tax Removed Under current law, all retirement funds (i.e. pension, provident and retirement annuity funds) are subject to the Tax on Retirement Funds –9% rate (down from a 25% historic high) –The tax impacts only retirement fund interest, rental and foreign dividends The Tax on Retirement Funds removed –As of 1 March 2007 –1 final payment still due

7. 7 Withdrawals Permissible withdrawals –Only a certain percentage of fund value can be withdrawn upon retirement (i.e. as a lump sum) –All the excess must be converted to a (guaranteed or living) annuity with funds withdrawn steadily over the post-retirement period Taxation of permissible withdrawals –Lump sum withdrawals: tax exemption plus tax averaging –Annuity withdrawals: growth is tax-free before withdrawal, but fully taxable upon withdrawal

8. Lump Sum Proposals

9. 9 Permissible Lump Sums Current Law –Pension and individual retirement annuity funds can be withdrawn equal to: the greater of 1/3 rd of total value or an amount bearing a per annum annuity up to R1 800) –Provident Funds can be fully withdrawn Proposal –The monetary R1 800 threshold will be abandoned –The new monetary threshold will be R50 000 as this sums relates to the 2/3 rds (the change prevents fees from outpacing potential benefits)

10. 10 Tax-Free Lump Sums: “Say Good Bye to (2) Old Formulas” Formula A (Good Bye!) –Y = 15/1 x N/50 x 1/3 rd x Average Salary –N means years of service –Maximum years (50) and salary (R60 000) Formula B (Good Bye!) –Z = C + E (minus) D –C means formula A, E means nondeductible contributions and D means pre-1941 deductible contributions Formula C stays (exemption for pre-1998 government years of service)

11. 11 Tax-Free Lump Sums: New Regime Under the new regime, the tax-free lump sum equals: –R300 000 (+) –Previous non-deductible contributions (+) –Pre-1998 Government employment (formula C) The new regime ends all reliance on “salary” and “years of service”

12. 12 Taxable Lump Sums: “Say Good Bye to Complex Averaging” Formula 5(10) (Good Bye!) –Y (A divided by [B + D – (C + L)]; (x) –(B – L); (+) –(L x R) –Along with other inputs In essence, the taxable lump sum was determined with reference to non-lump sum taxable income over 2 years with an 18% minimum Avoidance Scheme: Wealthy taxpayers reduced their lump sums to an 18% rate by relying on tax-free preference dividends

13. 13 Taxable Lump Sums: New Regime Under the new regime, the taxable lump sum is: –Taxed at 18% for the first R300 000 taxable amount (+) –Taxed at 36% for the remainder Complex averaging and planning opportunities removed

14. 14 New Lump Sum Regime: Combined Once the tax-free lump sum is considered, the net effect is a separate rate schedule for lump sums, as follows: –Previous non-deductible contributions and pre-1998 Government employment (formula C) are tax-free –Next R0 to R300 000 is tax-free –Next R300 001 to R600 000 is taxed at 18% –Next R600 001 & more is taxed at 36%

15. 15 New Lump Sum Benefits: Rationale Simplicity (including a simplified withholding regime) The new regime skews tax benefits in favour of lower- and middle-income earners High net worth individuals no longer benefit from the use of preference share schemes Note: The lump sum formulas are applied on a cumulative basis over the taxpayer’s lifetime

16. 16 Effective Date 1 October 2007 The delayed effective date provides sufficient time for operational systems changes Stay tuned for more changes!!