When I do presentations about retirement, I usually start with the amount of R1 410. No, this is not the price of a new golf ball in a month or two (if the rand continues its downward spiral), but rather the current government pension grant (R1 430 for people aged 75 or older).
I am convinced that this amount isn’t nearly enough for most readers upon retirement and, with the current tax period coming to an end in a matter of weeks, the time has come to take a good look at your personal retirement budget.
Regular news watchers must be aware of the big news regarding the new South African tax legislation, effective 1 March, and this news has many up in arms. Cosatu is extremely upset while Numsa is threatening strike action.
Several concerned clients approached me regarding the impact of this new legislation on their retirement investments – legislation that was initially planned for 1 March 2015 and then postponed for one year precisely because of concerns from the same groups. So should we see the glass as half empty or half full?
In short, I feel that in general this new legislation definitely offers more benefits than disadvantages for South Africans. By taking an exclusive look at retirement annuities, these changes entail the following:
The biggest change is probably the increase in the percentage of your allowable tax-deductible contribution (personal income tax), which has been increased from 15% to 27.5% with a limit of R350 000 per year.
Until now, this 15% was also only allowed on your non-pensionable income. With the new legislation the increase of up to 27.5% forms part of your taxable or gross income, whichever is higher.
This means that if you have an existing provident fund at your current employer to which you contribute 15%, you can now enjoy an additional 12.5% as an allowable tax deduction in a retirement annuity (RA).
Currently, you are allowed to withdraw 100% of an RA with a value of less than R75 000. This amount will be increased to R247 500. Any amount above R247 500 is still subject to only a third conversion to cash while two thirds have to be invested in a compulsory annuity.
The rest of the legislation remains unchanged.
I truly feel that the new legislation is extremely beneficial for existing RA owners and prospective RA owners alike.
All the people that I have helped with retirement planning over the years had one massive concern in common: In your younger (and especially married) years your gross income is relatively low, while your expenses are relatively high.
These expenses can include the purchase of your first car and/or house, perhaps followed by starting a family shortly after. Eventually, your children have to go to school and in many cases also have to complete a tertiary qualification, which leaves your cash flow panting louder than some very famous female tennis players.
It simply becomes too difficult to save the required 15% to 20% of your income for retirement.
On the upside, your children eventually have to leave the house and your personal debt can finally be lowered considerably or, in many cases, even be completely settled.
With the current legislation, even though this is the time that you can afford to save more than 15%, the allowable tax benefit is still limited to 15%.
The new legislation, therefore, makes it possible for South Africans to catch up in the later years of their careers because they may not have had the opportunity to save enough during their earlier years.
It doesn’t matter which way you look at it, on 1 March this year many new doors will be opening for retirement investments, including RAs. Don’t let retirement get you down financially – the earlier you start, the better.
*Schalk Louw is a portfolio manager at PSG Wealth.
This article originally appeared in the 4 February 2016 edition offinweek. Buy and download the magazine here.