By TERRY BETTY

MAJOR changes to the taxation of retirement funds have been put off until next year, which may tempt some people to retire before March 1998 in order to receive their pension or provident fund lump sums at a favourable tax rate.

Few changes have been made to the existing retirement tax system because the government is waiting for the recommendations of the National Retirement Consultative Forum.

Before the Budget, it was widely anticipated that the average tax rate applied to lump sum payouts from retirement funds, presently based on the previous two years of employees' average salaries, would be altered to the previous three years.

However, the anticipated change has been put on hold and there is still room for people who managed to engineer their income to a lower tax rate last year to do so again this year, and so retire from their fund before next March at a possibly lower tax rate.

Chris Newell of Old Mutual and president of the Institute of Retirement Funds says while the industry is pleased that as from March 1 next year there will be equal tax treatment of public- and private-sector fund members in terms of lump sums payable, inequality in the protection of vested rights is still a concern.

"Vested rights of public fund members are protected in an inflation-proof rand amount, based on final salary and years of service.

"But private-sector fund members only have the undertaking that the tax-free amount under the existing dispensation will be protected for a period of five years from the date of introduction of any proposed new formula."

Newell says this undertaking has been worded differently since last year. "Last year's Budget said proposed changes would be 'phased in' over five years; this year's Budget says that they will be 'protected' for five years."

Other changes welcomed by the industry include the abolition of the 0.75% levy on financial services. "But we query why we have to wait until January 1998 for its removal," says Newell.

"VAT was introduced on financial services in October 1996, and we have effectively had a double taxation on the funds since then - this tax should go immediately."

Newell says the announced change in the taxation of dividend income received by retirement funds from investments in property unit trusts is merely the closing of a loophole, as is compensation received for the lending of interest-bearing investments.

He says this will not have a significant impact on the funds as it represents such a small part of their income. "Most funds have a small exposure to property, and even then, not all of that is through property unit trusts, but is in directly-held property."

Funds will also now be subject to tax on interest income they earn overseas.

"Funds were never taxed on this before because the interest income was of a foreign source. In some instances the funds were not paying tax on this income overseas either, so it was tax-free income."

But Newell says that the impact will also not be that great as funds are limited in their overseas investments to asset swaps not exceeding 10% of their asset base and 3% of their cash flow. In addition, most asset swaps are for equity-based investments.