Tax-day: What it is and what you need to know!

2016-02-25 07:04

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South Africa has had a persistently low savings rate in the last two decades. In 2014, our gross (that is household, government and corporate) savings rate stood at about 15% of GDP and it is reported that only about 5% of South Africans save enough to be able to retire adequately.

To curb this, the National Treasury has promulgated reforms in the recent Tax  Laws Amendment Acts which are aimed at encouraging saving towards retirement through further tax deductions and the promotion of annuitisation.

The so called T-day, or 1 March 2016 implementation day, is likely to spark a surge of renewed interest in income tax deductions and capital accumulation for retirement. This is because the T day reforms provide for a new uniform and improved deduction regime for members of pension, provident and RA funds.

It is important to note that the annuitisation requirements for provident fund members are to be delayed so, in effect, the amendments will not deal with a change to the current annuitisation regime for retirement funds.  

The new law allows for a 27.5% (of the greater of member’s remuneration or taxable income) tax deduction on the combined contributions up to R350 000 in total per year made to an individual’s pension, provident and retirement annuity funds. This constitutes a significant improvement of the existing deductions enjoyed by pension fund and RA fund members and a vast improvement in the deduction regime for provident fund because, before T Day provident fund members were never afforded a deduction for their contributions.

Until 1 March 2018, provident and provident preservation funds will continue to be subject to different annuitisation rules to those imposed upon pension and retirement annuity funds in that members of provident and provident preservation funds will continue not have to annuitise their retirement benefits up until that point. The delayed proposals in respect of Provident fund annuitisation will be reviewed in 2018.

On retirement, members of pension and retirement annuity funds will be allowed to take a third of their funds in a lump sum, and the remaining two thirds must be annuitised – placed in a fund that releases money on a regular basis. This however will not apply where the amount at retirement is below R247 500.

Notwithstanding some objections to the T Day reforms, the new laws will result in more tax relief for most members of pension, provident and RA funds. This is due to the fact that, as stated above, these reforms provide for an improved deduction regime for most members of these funds.  

Retirement industry experts have generally welcomed the changes and believe members will benefit from it in the long run. One of the biggest benefits cited is that they encourage savings and ensure there is no risk of cashing out pensions and investing the entire amount into loss-making schemes.

Derick Ferreira says he expects the tax law changes to lead to an upsurge of interest in retirement annuities, pension funds, provident funds and Tax Free Savings Accounts (TFSA) this year as investors and retirees look at savings options that offer them maximum income tax concessions. “TFSAs are very suitable vehicles for topping up your retirement savings. Investors are free to withdraw all their money at any time, for whatever reason, with no restrictions or penalties. A consideration is to take full advantage of your retirement savings allowance through your pension, provident funds and RA's, and thereafter make use of TFSAs to boost your savings in accumulating capital.”

Advice matters, Ferreira stresses, especially during the current volatile markets and with all the tax changes. Speak to your accredited financial adviser to ensure that you plan well for the future in the most tax-efficient way and that is in line with your personal circumstances and needs.

Ask Old Mutual to call you back to find out how you can benefit from the 1st March T-day amendments.

* All information shared to date and contained in the material released, are a reflection of the actual information contained in the Taxation Law Amendment Act as at the time.

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