Treasury proposal could erode retirement savings
If proposals mentioned in the 2011 Budget documentation are revived, 2012 may be the last time taxpayers can top up their retirement annuity (RA) before the end of the tax year to maximise the deductions.
In last year’s Budget, mention was made of proposed changes to the tax treatment of contributions to retirement funds.
According to Dirk Kotze, tax partner at global audit, tax and advisory firm Mazars, Treasury discussed treating all retirement products as one product and not differentiating between pension funds, provident funds and RAs. Instead, a new, combined deduction of the lower of 22.5% or a maximum of R200,000 was proposed, with a minimum annual deduction of R12,000. Since then, no further mention of this proposal has been made, nor has any legislation come to light.
“But this doesn’t mean SARS can’t revive this proposal in the 2012 Budget Speech and make the changes effective as early as 1st March 2012,” says Kotze.
Currently individuals can contribute up to 15% of non-pensionable income to a retirement fund and 7.5% of pensionable income. Added together, they equal 22.5%.
If the proposal becomes reality, Kotze says it could act as a disincentive to save for retirement, particularly among higher income earners, who will easily breach the R200,000 cap. This will mean more PAYE and less money in their pockets each month.
South Africa already has a low savings rate and only about 8% of the population can retire comfortably. If retirement products aren’t considered tax efficient, higher income earners might think twice about investing in them, says Kotze.
“Unless compelled to contribute to a company pension or provident fund, they may decide to spend their money instead of taking out an RA, or look for better investments overseas.” This could lead to fewer individuals with enough to retire on. If they invest overseas, this could have a negative impact on foreign exchange.
“RA’s have always been an important feature of retirement savings. Because they can’t be touched until retirement, they act as a handbrake on impulsive spending. Treasury’s proposals could be the death knell for these products,” Kotze concludes.
