UNIT 1

EMPLOYEE
BENEFITS
PRESENTED
BY
MR. MADZHIYA H
 LEARNING OUTCOMES

TYPES OF EMPLOYEE
EMPLOYEE BENEFITS BENEFITS

UNIT RETIREMENT FUNDS (RETIREMENT RELATED

OUTLINE BENEFITS)

FUND GOVERNANCE

INCOME TAX ON BENEFITS

LEARNING OUTCOMES

• Explain different types of employee benefits

• Explain all regulatory requirements for the establishment and registration of a fund
• Critically evaluate the legal implications of the registration of a fund in terms of the
Pension Funds Act,
• Explain the conditions relating to membership of a fund;
• Render advice to a board of trustees regarding the objects, duties, and powers of
the board of management of a fund;
• Explain the conditions of appointment, role, and duties of the principal officer
• Advise on the requirements for administrators of funds
LEARNING OUTCOMES Continues

• Assess the manner in which the assets of funds may and must be invested
• Explain the manner in which fund benefits are protected and advise clients
on the actions that may be taken against a fund in respect of claims for
deductions from benefits;
• Explain the income tax on lump sum withdrawal and lump sum retirement
benefits
• Arrange for the assets and liabilities of a fund to be legally transferred
from/to a fund to another entity;
• Discuss, calculate and interpret actions to be taken when making payment
to benefitiaries.
EMPLOYEE
BENEFITS
EMPLOYEE BENEFITS

• What is employee benefits?

• Rewards that employees receive for being members of the organization and
for their positions in the organization.
• Usually not related to employee performance (unlike wages, salaries ,and
incentives )
• Most benefits apply to all employees of the organization, however ,Some
are reserved solely for executives
• Certain benefits are often extended to spouses (ex. health insurance )
EMPLOYEE BENEFITS Continue

• Types of Employee benefits:

• Unemployment Compensation: Form of insurance designed to provide funds to employees who
have lost their jobs and are seeking other jobs
• Workers’ Compensation: Form of insurance that protects employees from loss of income and
extra expenses associated with job-related injuries or illness.
• Retirement-Related Benefits: Retirement and pension plans, which provide a source of income
to retired people, and represent money paid for past services.
• Insurance-Related Benefits (Health Insurance): Many health insurance plans cover Normal
hospitalization and outpatient doctor bills, Prescription drugs, Dental, eye, and mental health
care
• Payment for Time Not Worked: Standard practice for organizations to pay employees for certain
times when they do not work
 RETIREMENT
RELATED
BENEFITS
(RETIREMENT
FUNDS)
RETIREMENT BENEFITS

• Financial planners often act as employee benefits

advisers/consultant that advise the board of trustees of
retirement funds or employer on the legislative framework within
which the funds must operate, including recommendations on
benefits design.
• Financial planner also advices individual member in respect of
their membership of retirement fund.
LEGISLATIVE ENVIRONMENT

• The Pension fund Act 24 of 1956 (“the Act”)

• Regulations issued in terms of the Act (“the regulations”)
• The Financial Sector Regulation Act 9 of 2017 (“FSRA”)
• The Income Tax Act 58 of 1962 (“ITA”)
• Pension Fund (PF) Circulars and Notices, FSRA Conduct Standards and PF
Directives Issued By the Register of Pensions Funds.
• Prudential Authority
• Financial Sector Conduct Authority (“FSCA)
LEGAL NATURE OF A RETIREMENT FUND

• Section 1 of the Act defines Pension Fund Organisation as

a) Any association of persons stablished with the objective of providing annuities or
lump sum payments for members or former members of such association upon
their reaching retirement dates, or for the dependants of such member or former
member due to death
b) Any business carried on under a scheme or arrangement established with the
objective of providing annuities or lump sum payments for persons who belong or
belonged to the classes of persons whose benefits that scheme or arrangement has
been established, when they reach their retirement dates or for dependants upon
death of such persons
c) Any associate of persons or business carried on under a scheme or arrangement
established with the objectives of receiving, administering, investing and paying
benefits that became payable in terms of the employment of member on behalf of
beneficiaries, payable on the death of more than one members or more pension
funds
APPLICATION FOR REGISTRATION

• A persons acting on behalf half of the participating employer or person

managing the business of the fund for the time being must apply to the
FSCA for the fund to be registered in terms of the Act.
• A fund can commence operating either on provisionally or complete
registration upon approval by the FSCA, if the application considered to have
meet the registration requirements. See page 975 of the SAFPH for
requirements that need to be met by the fund to be granted permission to
operate.
FUND RULES

• The rules set out by the funds are binding to its members, shareholder,
officers, as well as any person claims under the fund rules.
• All amendments to the fund rules must be approved by the FSCA before
they acted on.
• The amendments must also be approved by the South African Revenue
Services (“SARS”).
DIFFERENT TYPES OF RETIREMENT FUNDS

• Occupational Funds
• This fund is defined in terms of section 1 of the act para (a).
• Non- Occupational (Individual) Funds
• This fund is defined in terms of section 1 of the act para (b).
• Beneficiary Funds
• This fund is defined in terms of section 1 of the act para (c).

• The FSCA register both pension and provident funds as pension fund
organisations as defined in the Act.
PENSION FUNDS

• Pension funds are investment funds created to provide retirement benefits for
employees.
• Pension funds can be either defined benefit or defined contribution plans, and they
can be funded by employers, employees, or both.
• Fund must be registered with the FSCA
• There must be employer-employee relationship.
• It must be a condition of employment that membership is compulsory for all
employees or category of employees
• Both employer and employee can contribute to the fund for the benefit of
employee
PENSIONS FUNDS Continue

• A member can deduct up to 27,5% of the higher of their remuneration and

taxable income, subject to a maximum of R350 000 per year, for both
member and employer contributions.
• Employer contribution is treated as fringe benefits.
• A maximum of one third of the retirement interest (vested rights excluded)
may be taken as a lump sum at retirement and two third must be used to
buy a lifelong non-commutable annuity, except where the total is no more
than R247 500, in which event the entire benefit may be taken as a lump
sum.
PROVIDENT FUNDS

• A provident fund​ is an investment fund that is voluntarily established by Employer

and employees to serve as long term savings to support an employee’s retirement.
• Fund must be registered with the FSCA
• There must be employer-employee relationship.
• It must be a condition of employment that membership is compulsory for all
employees or category of employees
• Both employer and employee can contribute to the fund for the benefit of
employee
• A member can deduct up to 27,5% of the higher of their remuneration and taxable
income, subject to a maximum of R350 000 per year, for both member and
employer contributions
PROVIDENT FUNDS Continue

• On 1 March 2021, A maximum of one third of the retirement interest

(vested rights excluded) may be taken as a lump sum at retirement and two
third must be used to buy a lifelong non-commutable annuity, except where
the total is no more than R247 500, in which event the entire benefit may be
taken as a lump sum
• if the member of a Provident fund or a Provident preservation fund was 55
years of age or older on 1 March 2021, contributions made to that Provident
fund or transferred made to that Provident preservation fund, both before
on after 1 March 2021(and growth thereon ) can be taken in cash, provided
that the member remains a member of that provident fund or provident
preservation fund of which they were a member on 1 March 2021.
BENEFICIARY FUNDS

• Beneficiary fund is defined in section 1 of the Act para (c) under the
definition of pension fund organization.
• In simple term, beneficiary funds have been defined as having the express
purpose of receiving death benefits allocated in terms of section 37C of the
Act upon death of members of retirement funds and managing the
administration, investment and payment of these benefits to beneficiaries.
• Retirement funds may only pay allocated death benefits to a registered
beneficiary fund, no longer to a trust, unless the trust was nominated by the
member or major beneficiary or a person recognized by law in managing the
daily affairs of a minor nominee.
 FUND
GOVERNANCE
BOARD OF TRUSTEES

• Each registered fund is required to have board of trustee

• A minimum of 4 members are required, of which members have the right to
elect at least 50%.
• FSCA requires that each member elect on the board of trustees must have
necessary skills and training, that any trustee appointed to the board must
under-go a 6 months training from date of appointment.
BOARD OF TRUSTEES

• Section 7C(1) Pensions Fund Act 24 of 1956 (PFA) provides that "the object
of a board shall be to direct, control and oversee the operations of a fund in
accordance with the applicable laws and the rules of the fund".
• Duties of board of trustees section 7D of act.
• 7D (c) of the Act states that the rights, benefits and duties of members must
be communicated to them by the trustees.
• The trustees must ensure that the information is adequate and
appropriate and that the members understand their rights as conferred
upon them by the fund rules
APPOINTMENT OF ADMINISTRATORS

• An administrator of the fund can be an insurer, employer, the fund it self, or

a private administrator.
• Any entity that administer the retirement fund must be registered with e
FSCA
• Any retirement fund that undertakes its own benefits and contribution
administration is exempt from this provision of Section 13B
• The trustees should consider thing such as, fees, systems and processes,
track records, depth of resources, etc., before appointing an administrtor
PRINCIPAL OFFICER

• Must be an individual who is a resident in South Africa

• Duties:
• Amendment of the rule
• Reports by monitoring person
• Valuation of the fund assets and liabilities
• Signing documents
• Amalgamations and transfers
• Financial statements
• Compliance
FUND FINANCING

• SELF READ
• NB:
• Fund contribution and penalties
• Retirement benefits
• Death benefits
• Withdrawal benefits
• Retirement reforms
INCOME TAX ON
LUMP SUM
&
SEVERANCE
BENEFITS
TAX ON LUMP SUM DERIVED FROM RF

• Before a retirement fund, employer, or member of a retirement fund will

qualify for the tax concession afforded by the ITA, the fund must be
approved by the commissioner of SARS as either:
• A pension fund
• A provident fund
• Provident or pension preservation fund
• A retirement annuity fund
TAX DIFFERENCES BETWEEN PENSION AND PROVIDENT
FUND

• Historically the main tax difference between a pension fund and a provident
fund is that in case of pension fund, one-third of the total retirement
interest can be taken in a form of a lump sum and in the case of provident
fund the full amount would be taken as a lump sum.
• As of 1 March 2021, the position is different. As a result of the amendments
to the act, pension funds, provident funds, preservation funds and
retirement annuity funds now all contain a rule that no more than one-third
of the members interest in the fund can be taken as a lump sum.
THE FORMAT OF THE BENEFITS

• The amount of tax that is payable on a lump sum from retirement funds
depends on:
• Whether it is a “retirement fund lump sum benefits” or a “ retirement
fund lump sum withdrawal”; and
• Whether the taxpayer has previously received taxable lump sum benefits
from a retirement fund or serverance benefits.
RATE OF TAX PAYABLE ON RETIREMENT FUND LUMP
SUM BENEFITS

• Retirement fund lump sum benefits consist of lump sums from a pension, pension
preservation, provident, provident preservation or retirement annuity fund on death,
retirement, or termination of employment due to attaining the age of 55 years, sickness,
accident, injury, incapacity, redundancy or termination of the employer’s trade.
RATE OF TAX PAYABLE ON RETIREMENT FUND LUMP
SUM WITHDRAWAL

• Retirement fund lump sum withdrawal benefits consist of lump sums from a
pension, pension preservation, provident, provident preservation or retirement
annuity fund on withdrawal (including assignment in terms of a divorce order)
WITHDRAWAL BENEFITS TAX TABLE MUST BE USED AS
FOLLOWS

• The Withdrawal benefits table should be used as follows:

• Step1: Determine the retirement fund lump sum withdrawal benefits in terms of para 6 of the second
schedule.
• Step 2: Determine any previous taken lump sum or accrued lump sum by tax payer
• Withdrawal before on or after 1 march 2009 (
• Withdrawal on or after 1 October 2007
• A severance benefits before on or after 1 march 20211
• Step 3: Determine the aggregate of all lump sum benefits referred to step 1 and 2 and calculate tax on
aggregate
• Step 4: Determine the aggregate of prior lump sum benefits or severance benefits referred in step 2
and calculate tax on that aggregate by using same tax table
• Step 5: Deduct the amount of tax determined in step 4 from tax determined in step 3. difference is the
amount payable by the tax payer.
FOLLOWING SUBTOPICS TO BE COVERED USING THE
HANDBOOK ACTIVITIES

• DEDUCTION AGAINST LUMP SUM

• DATE OF ACCRUAL OF LUMP SUM BENEFITS
• DEDUCTION ALLOWED AGAINST LUMP SUM RECEIVED ON DEATH,
RETIREMENT OR RETRENCHMENT
• PUBLIC SECTOR PENSION FUNDS
• SEVERANCE BENEFITS
 END OF
LESSON
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