Retirement annuities still a great “Tax Neutraliser” despite budget, Says Standard Bank

Errol Meyer, Head of Advisory Services at Standard Bank Financial Consultants.

South Africans should still consider retirement annuities (RA’s) as a mechanism to neutralise the impact of taxes on their post-retirement financial goals despite the fact that there was no significant increase in personal income taxes in the 2018 Budget, says Standard Bank’s top financial planning expert.

Finance Minister Malusi Gigaba today left the marginal tax rate at 45% for individuals earning more than R1.5m a year. Instead the National Treasury plans to raise R6.8bn from the personal tax system by limiting inflation relief for personal tax rebates. The lowest three personal income tax brackets and the primary, secondary and tertiary rebates will be partially adjusted for inflation via a 3.1% increase, while the top four brackets remain unchanged for the fiscal year commencing 1 March 2018.

“RAs are an extremely tax efficient savings vehicle to ensure that you stay on track with your long-term financial planning goals, which are in all likelihood going to extend beyond daily living expenses and medical needs,” said Mr Errol Meyer, Head of Advisory Services at Standard Bank Financial Consultants. “Most people don’t realise that RAs are not only for retirement purposes – they are a tax efficient way of building up funds to finance your long-term future.”

Meyer points out that given the fact that as of 1 March 2016, South African taxpayers are generally allowed to place as much as 27.5% of their earnings in retirement savings vehicles, and receive the full amount as a tax deduction, albeit in the current year or the following years of assessment, it makes senses to utilize this full tax-free allocation. Taxpayers may even include any capital gains that they are liable for in a particular year of assessment as part of the 27.5% tax deduction.

“Most people in South Africa don’t even save at all, let alone use the full 27.5% tax free retirement allocation,” says Meyer. “By using your full 27.5% allocation you are able to neutralize the impact of taxes on your savings and at the same time make a meaningful contribution to your post-retirement financial future.”

Meyer says current estimates indicate that only between 3% and 6% of South Africans can afford to retire, thanks to the country’s pitifully-low savings rate. The so-called “sandwich generation” will be under particular pressure as this cohort of the population - who are typically within 10 years of retirement - are responsible for supporting their own children whilst also caring for their aging parents. According to some research, approximately 50% of all South African adults fall into this so-called “sandwich generation”.

Rather than fret about the tax burden, Meyer says consumers should rather focus on improving their financial planning in order to meet their post-retirement goals. Apart from RAs, consumers can also utilize tax-free savings accounts as a means of gaining relief from taxes.

“The trick is to rewire rather than retire,” says Meyer. “Instead of retiring from life rather look at how you can rewire for new challenges, one of which will be planning for your financial wellbeing.”