You are probably aware there are some changes to the rules governing retirement savings, which come in effect on the 1st March. Unfortunately the only reason you are probably aware of this is all the negative publicity around Cosatu’s threats of mass action in protest against some of the changes, which were to be implemented.
Our new (old) Finance Minister has agreed to postpone the changes to provident funds, which would have forced annuitization of at least 2/3rds of provident fund values and this is what Cosatu are so upset about. Currently provident fund members can take their full benefit in cash notwithstanding the negative tax implications.
Clearly Cosatu are being poorly advised or they don’t understand the proposed changes, which are arguably in the best interest of their members, but I don’t want to spend any more time on this hugely wasteful action, which is just another symptom of The State of the Nation.
The most beneficial change, which comes in effect on the 1st of March, is the increase and simplification of the tax deductible retirement fund contribution, which will be set @ 27.5% of your taxable income. The simplification refers to the fact that the 27.5% includes all contributions to pension / provident funds and retirement annuities. Under the current rules, which have been in place since “Pa fell off the bus”, members of pension / provident funds were limited in the amount they could contribute to retirement annuities before tax, thus unable to top-up their retirement fund contributions.
Under the new rules every South African serious about retirement should jump on the opportunity to increase their tax deductible retirement fund contributions as at 1 March either via their employer fund or personal retirement annuity.
The majority of retirement fund members currently contribute 15% of their income to retirement; this can now be increased to 27.5% tax deductible saving. That is an additional 12.5%, almost doubling current savings; and the best part is that it is tax deductible, which effectively sees SARS subsidizing your retirement.
Often forgotten is the fact the retirement funds are not liable for tax, the tax saving compounds into greater returns vs. comparative discretionary investments. Of course you will pay tax on your pension one day, but let’s worry about that when you get to retirement. For now most South Africans are seriously underfunded and should not think twice about increasing their retirement savings. Just do it!
Mcomm, CFP®, HdipTax
T. 021-851 3746