"Contrary to false rumours, Government has no intention to take over the hard-earned deferred income of workers, whose funds will remain under the control of their trustees," the presidency said on Thursday.
President Jacob Zuma did not act unilaterally when signing the Tax Administration Amendment Act, the presidency emphasised in a statement issued on Thursday.
"The law was considered at Nedlac (National Economic Development and Labour Council). It was also discussed openly in parliament," the presidency stated. "It was passed by both the National Assembly and the National Council of Provinces following public hearings."
The government has merely updated the Taxation Laws Amendment Act, which was passed in 2013. The 2013 version harmonises all retirement funds for tax purposes and consolidates employer and employee contributions.
Government has also improved the law to ensure better governance practices by trustees, and intends to strengthen these measures further, according to the presidency.
The 2013 law allows for a 27.5% tax deduction up to a maximum of R350 000 per year. The key condition for enjoying the tax deduction is that members take a lump sum up to one-third the amount, with the rest to be annuitised (an annuity investment converted into a series of periodic income payments).
"This law should have been implemented on March 1 2015, but was delayed by one year to take account of concerns raised by some stakeholders, including Cosatu. The only change to the law that government is considering this year, is to confirm that the new law will take effect on the scheduled date of March 1 2016 alongside an increase in the threshold above which members are required to purchase an annuity," the presidency explained.
"It is envisaged that workers will be encouraged to save (more) through retirement funds, to curb old-age poverty and excessive dependency on relatives."
Speaking during a post-cabinet briefing in Pretoria, Finance Minister Pravin Gordhan told media that Treasury is trying to equalise the benefits of pension funds and provident funds.
"The pension laws signed this week are about the welfare of workers and encouraging saving in our economy," said Gordhan. "I am willing to sit around the table with those who have concerns about the new laws."
South Africa has had a persistently low savings rate in the last two decades. In 2014 the gross savings rate stood at about 15% of gross domestic product.
"Low savings create a shortage of funds for investments, resulting in South Africa having to rely excessively on volatile short-term capital inflows, which can affect the rand’s purchasing power," said the presidency.
"A low savings rate creates a funding gap for investments – investments are important for economic development and growth."
Members of provident funds will, similar to members of pension and retirement annuity funds, be able to claim a tax deduction on their contributions to their funds.
"There are over 2.5-million provident fund members who contribute to a provident fund. Around 1.25-million are likely to see an increase in their take home salaries, and many more will receive the tax deduction if they decide to save more for their retirement," Treasury explained.
It pointed out that low savings can also result in excessive indebtedness, as individuals have to borrow to meet unexpected expenditure.
Measure to curb tax dodgers
The law update is also meant to address government's concern about tax avoidance structuring, where high-income taxpayers are able to structure their remuneration packages to reduce their tax liability out of proportion to what government considers to be fair.
The reforms also aim to boost post-retirement income by extending the requirement to purchase an annuity to provident funds. Vested rights are protected, ensuring that the impact of annuitisation takes longer to be felt by provident fund members.
"The government is encouraging everyone who has a job or income to save for their retirement," the Presidency said.
The effect of the alignment between provident and pension funds will not affect provident fund members who are currently close to retirement. All provident fund members will still be able to take all their retirement savings that would have been accumulated as at March 1 2016 as a cash lump sum whenever they go into retirement.
The conversion of a portion of the retirement money into income at retirement will only apply to new contributions made by those who are younger than 55 when the legislation comes into effect. This means that members who are 55 years and older on March 1 2016, when the law comes into effect, will not be affected.
Workers who are below 55 years on March 1 2016 will not be asked to annuitise or take a pension on the portion of new contributions if the total of those accumulated savings is R247 500 or less when they reach retirement. Irrespective of age, whatever a member has accumulated in the provident fund as at March 1 2016, and the growth on those amounts, will be available to them as a cash lump sum when the person retires.
The implementation of the act will not take away the right of provident or pension fund members to withdraw their benefits before or at retirement as a lump sum.
On Wednesday the Congress of South African Trade Unions (Cosatu) said it is "deeply incensed and disappointed" to hear that Zuma has now officially signed all tax legislation from 2015 into law. The union regards the legislation as "an offence against all working people, who have their deferred wages to look forward to after retirement".
Cosatu added that it refuses to be coerced into accepting what it regards as greater government activity and involvement in the affairs of individual workers.
In Cosatu's view the new legislation is a sign of the state's "determination to continue to impose the ineffective and much discredited conservative neoliberal macroeconomic framework". Cosatu said workers would fight any attempts to impose the compulsory preservation of their deferred wages, regardless of the sincerity and noble motives underlying the new laws.
Cope: You can't have your cake and eat it
On Thursday the Congress of the People (Cope) said it is surprised by Cosatu's "war talk".
"It is just playing to the gallery. Its leadership wants to pretend to the membership that Cosatu is in disagreement with the Tax Laws Amendment Act and the Tax Administration Laws Amendment Act. Yet, as everyone knows, its senior members are sitting in parliament and the cabinet. These members voted in favour of this bill," said Cope spokesperson Dennis Bloem.
"The Tax Laws Amendment Act and the Tax Administration Laws Amendment Act will standardise the extent to which pensions funds can be accessed on termination of employment. Without preservation of such funds it is the state that will have to support workers in their old age. It has clearly dawned on the ruling party that resources are very inelastic and that it can no longer take added responsibility."
Cope regards Cosatu's stance as wanting to have its cake and eat it too.
"Its attitude is totally irresponsible. Every worker who can, should provide for his or her old age. Workers cannot blow their pension savings and then expect government to rescue them. The burden on the state is already enormous," said Bloem.