Investing, Retiring and the Budget

The challenge Finance Minister Pravin Gordhan faced in his 2012/13 Budget was how to narrow the budget deficit, meet social spending demands and maintain infrastructure investment. He essentially did so by raising taxes and the tax burden.

Tax and tax policy are important considerations in most individuals’ investment strategy and retirement planning, and personal tax relief of R9.5 billion was given. However, the tax burden will effectively rise by R74.6 billion, aided by inflation, the imposition of new taxes and an increase in other taxes such as CGT (capital gains tax)

Investment and retirement planning received many mentions in the Budget speech and some initiatives were announced. However, the speech was more ambitious than the actual provisions in the budget. Taxes were in effect raised on saving and investing, with some measures thrown in to mitigate the increases.

The dividend tax, which will replace the 10% STC (secondary tax on companies), was set at 15%, and while it has certain exemptions – such as when paid to companies and retirement funds – it is taxable when received by individuals. For people dependent on dividend income, the effect of this tax will be to reduce their income by 6%, which will be particularly painful when viewed against an inflation rate of more than 6%.

CGT was also raised from an effective rate of 10% to 13.3%. Some thresholds were raised, such as the R2 million exclusion of the disposal of a primary residence. CGT is effectively a wealth tax as there is no indexing to inflation, which has been creating nominal gains, boosting taxes but eroding value.

Transfer duty on the purchase of property was unchanged, meaning it remains expensive to buy property costing more than R600 000.

Essentially, this was not a good Budget for the saver, although there are measures in the pipeline that could help. Provisioning for retirement will change in 2014 to a ceiling of 22.5% of income for taxpayers under 45, limited to R250 000 a year. For taxpayers over 45, the ceiling rises to 27.5% of taxable income with an annual limit of R300 000. There will be other changes to the rules regarding provident funds, retirement annuities and pension funds.

The allowances for interest earned did not change, which places people dependent on interest income under pressure due to the low interest rates and higher inflation.

The Minister introduced a household savings incentive, which will be in place by April 2014. This will be a vehicle for the tax-free accumulation of discretionary savings and is intended to boost household savings other than for pension provisioning. The allowance will be R30 000 a year with a maximum contribution of R500 000. While the concept is good, this vehicle will not be available for the next tax year starting 1 March 2012. The proposed allowance of R30 000 is also derisory given the urgent need to boost aggregate savings levels.

On balance, this Budget targeted savings and wealth accumulation. While the rich will be able to absorb the burden fairly easily, the middle class will be hardest hit. This is because the thresholds have been set at levels that will further hamper the middle class in building up savings in an economy that is savings deficient.

Despite the challenges facing the saver, improving savings provisioning needs to be a key focus of household budgets. The state of the global economy means the individual is increasingly having to take on more risk, especially regarding medical and retirement. Governments are becoming increasingly cash strapped and many state benefits currently promised (especially in richer countries) will never materialise. This means individuals and households need to pay attention to their financial position and understand how this will unfold. One of the biggest financial planning mistakes is to assume pension provisioning is adequate or that there is sufficient time to rectify any projected shortfall. Inflation is an insidious cancer that hampers wealth accumulation, and financial-market returns are under pressure. Most retirees find they have under-provided for their so-called golden years. One big mistake is to allow current expenditure to hamper adequate retirement provisioning. If this is the case, the current lifestyle is overstated.

It is recommended that everyone ensures their pension deductions are at the level that accesses their maximum taxable allowance. This is essential, as even this is not adequate to maintain your lifestyle after retirement. Further discretionary savings have to be made above what is being set aside for a pension. It is also recommended that full use is made of the household savings incentive when it becomes available. Hopefully, the annual threshold of R30 000 will be raised to a more meaningful level.

Increasing savings in this new tax year will prove more difficult as economic growth lags behind inflation. Tariffs will again increase at levels way above inflation to pay for government infrastructure investment plans, and inflation will also remain relatively elevated in 2012. Investment returns may also be subdued if systemic issues in Europe and Japan drag the global economy back again. However, increasing savings is an essential part of reducing the risks associated with retirement provisioning.