Government to shake up retirement saving rules in Budget 2013

Retirement Annuities (RAs) are useful savings vehicles that protect assets from tax, while saving towards retirement. Locally, their popularity has grown considerably, says STANLIB Retail CIO, Anthony Katakuzinos. STANLIB has seen a 40% rise in flows into

In large part, their attraction has been attributed to the tax benefits they provide. However, legislation specifically around these tax benefits is set to change in the 2013 Budget, says Katakuzinos.

For the first time, caps will be imposed on the tax deductible benefits of RA contributions. In the next financial year (2013/4), the amount one can contribute - to both a Retirement Annuity and Pension Fund – as a deduction against one’s taxable income, will be capped at R250,000pa for investors under the age of 45, and R350,000 for over 45s.

As it stands, up to 15% of one’s non pensionable income can be invested into an RA – with entitlement to a tax deduction. As this will change post 28 February 2013, topping-up one’s existing RA is recommended.

“The move is in line with Treasury’s restructuring of pension reform, and we anticipate further changes with time. We also 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.”

Contributions would be limited to R50 000pa, 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 utilized. However, the RA has one more powerful benefit of being excluded from one’s estate, he says.

“Initiatives such as these highlight Government’s efforts to encourage general saving and incentivize middle income earners to save over the long-term, notably for retirement. The burden on the State needs to be lifted”, said Katakuzinos.

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 to reduce state dependence post retirement.

Katakuzinos expects the Budget to also address the tightening up on rules around preservation. He says South Africans are increasingly dipping into their retirement savings pool prematurely, leaving the national kitty severely depleted - and inadequate - come retirement age. This is evidenced by the total Pension Fund assets in RSA not really growing much over the past 10 to 15 years.