South Africa’s new Minister of Finance, Nhlanhla Nene, will table his maiden Budget Speech to Parliament on 25 February 2015. Many commentators are expecting him to announce an increase in tax in some form or other.
South Africa’s new Minister of Finance, Nhlanhla Nene, will table his maiden Budget Speech to Parliament on 25 February 2015. Many commentators are expecting him to announce an increase in tax in some form or other.
This would make it more difficult for individuals and families to make ends meet and also make it harder for them to save.
The good news is that Nene is unlikely to announce any change to government incentives that currently exist to encourage taxpayers to save for their retirement. One of the most attractive of these is the tax relief associated with a retirement annuity, contributions towards which immediately reduce the amount of tax that has to be paid.
A retirement annuity is essentially a private pension plan.
Introduced some 40 years ago to cater mainly for the self-employed, these plans soon also became an option for salaried employees wanting to increase their savings towards retirement, while at the same time reducing the amount of tax payable.
When they were first introduced, retirement annuities were inflexible, provided limited fund choice and were costly.
Policyholders were heavily penalised when they needed to make changes to their plans.
But this has all changed, and today retirement annuities are incredibly flexible, offer extensive fund choice (within parameters) and are structured to allow the policyholder to increase or decrease, or even cease monthly premiums without incurring penalties.
There is no longer a compulsory retirement age associated with a retirement annuity, allowing individuals who have already retired to continue contributing to a retirement annuity and obtain the associated tax benefit.
Every taxpayer is currently entitled to deduct contributions of up to 15% of his or her non-pensionable income from taxable income, regardless of whether or not he or she also saves through some other form of retirement fund.
The expectation is that from 1 March 2017 individuals will be able to deduct retirement fund contributions to any type of fund of up to 27.5% of their taxable income or remuneration, whichever is the greater.
This means most people will have the capacity to save even more tax under the new dispensation than is currently the case.
At the moment there is no better way for an individual to save for retirement than through a retirement annuity.
Investment returns are tax-free, in other words they are not subject to income tax, capital gains tax or dividends tax.
Equally important, the amount invested in a retirement annuity cannot be attached by creditors.
On the death of the investor, the proceeds of a retirement annuity are not subject to executor’s fees or estate duty.
A retirement annuity can therefore be utilised as an extremely effective estate-planning tool.
Taxpayers who do not take advantage of the retirement annuity deduction end up paying more than their share of income tax.
There’s no such thing as a free lunch, but an investment in a retirement annuity comes pretty close.
* Rands and Sense is a monthly column, written by Ross Marriner, an accounting and tax practitioner and certified financial planner.
