Government to shake up retirement saving rules

In the next financial year, for example, caps are to be imposed on the tax-deductible benefits of Retirement Annuity (RA) contributions. This means that the amount one can contribute to both a Retirement Annuity and a Pension Fund, as a deduction against one’s taxable income, will be capped at R250 000 a year for investors under the age of 45 and R350 000 for those over 45.

As it stands, up to 15% of one’s non-pensionable income can be invested into an RA, with entitlement to a tax deduction. Because this will change after 28 February 2013, topping up one’s existing RA is recommended, says Anthony Katakuzinos, Stanlib’s Retail CIO. (Topping up one’s RA as and when one can is never a bad idea, incidentally.)

Katakuzinos says the appeal of RAs has typically been because they are savings vehicles that protect assets from tax – Stanlib alone has seen a 40% rise in flows into RAs since 2008 and investor numbers have doubled over the period.

 

But with the legislation around these tax benefits about to change, will RAs continue to be as attractive?

 

In fact, they will probably remain vital, post-retirement. One significant advantage of the humble RA is that is still has the benefit of being excluded from one’s estate and, as with pension funds and living annuities, there is no tax on interest, dividends or capital gains.

Pension reform is likely to increasingly offer new ways for one to save and invest, post-retirement.

 

"We expect a new, tax-free savings vehicle to be launched in 2014. It would allow people to invest in a savings account – like a designated Unit Trust account – with a tax-break on income and related CGT as long as the funds remain in the account,” says Katakuzinos.

 

Contributions would be limited to R50 000 a year, or R500 000 over the investor’s life span. Katakuzinos says this benefit is similar to that of an RA once the contribution limits have been fully utilised.

 

"Initiatives such as these highlight government’s efforts to encourage general saving and incentivise middle-income earners to save over the long-term, notably for retirement. The burden on the State needs to be lifted,” he stresses.

He believes we are likely to see further incentives around ongoing rules governing pension funds, with the focus on preservation of funds until retirement. The ultimate aim is to encourage saving and ensure that individuals are not burdens on the State, post-retirement.

The Budget will likely address how the rules around preservation are to be tightened up. Katakuzinos says South Africans are increasingly dipping into their retirement savings pool prematurely, leaving the national kitty severely depleted – and inadequate – come retirement age. So indebted have some South Africans become that they have considered leaving their jobs purely to settle their debts using their pension fund money.

This is dire, because these depleted savings leave people financially vulnerable. The total Pension Fund assets in South Africa have not really grown much over the past 10 to 15 years, and it becomes apparent why this this. Currently, you can put your savings into a preservation fund until you retire and pay no tax thereon.

 

It seems likely that government will make preservation compulsory, though if you are in genuinely dire financial straits you may be exempt (if you have ‘demonstrated medical need’, for example). It may be, for example, that if you are retrenched and cannot find another job you can withdraw up to one-third of your savings after you have exhausted your Unemployment Insurance Fund benefits.

 

Retirement reform is a huge topic, but we will keep you up to date as government implements decisions that will affect the industry.