Tax policy uncertainty makes good retirement advice crucial for all South Africans

Derick Ferreira of Old Mutual explains how to navigate the new retirement legislation

Derick Ferreira of Old Mutual explains how to navigate the new retirement legislation

Many cash-strapped South Africans may be tired of hearing they don’t save enough. Let’s face it, rising living costs, inflation and interest rates can make even surviving from payday to payday feel like a real feat.

The good news is that there are several new initiatives that aim to help ordinary consumers meet their immediate needs as well as their longer-term goals. 

The much-discussed retirement reforms implemented on March 1 (T-Day) are a prime example.

The new retirement contribution deduction regime has several important benefits for South Africans. Combined with the tax-free savings account (TFSA) framework introduced by government last year, the new tax concessions provide a good opportunity to boost your retirement savings.

Derick Ferreira, senior product manager at Old Mutual, explains that the new legislation enables South Africans to enjoy the same tax concessions across all retirement funds, namely retirement annuities, pension and provident funds.

He says from T-Day, you are now able to make tax-deductible retirement fund contributions of up to 27.5% of the greater of your “remuneration” and “taxable income” up to a total of R350 000 a year. The recently released draft Taxation Laws Amendment Bill 2016 makes it clear that “taxable income” in this regard also includes the passive income earned by members. This means that more savings will qualify for a tax deduction. By contributing more, you can work towards a more secure retirement.

As matters now stand, one aspect of the original proposals — the proposed provident fund annuitisation — has been postponed until March 1 2018. This may also mean that the proposed new tax concessions pertaining to provident funds will be reviewed at the end of the two-year period to achieve fairness between all retirement funds.

If no further changes are made to the framework, then in two years’ time when it comes into effect, provident and provident preservation funds will be subject to the same annuitisation rules as pension, pension preservation and retirement annuity funds.

Ferreira says the new laws aim to reduce the widespread problems of poverty in old age and excessive dependency on the state and on relatives, which are major problems in our country.

He expects the tax law changes to lead to an upsurge of interest in all savings vehicles this year, as investors and retirees look at savings options that offer them maximum income tax concessions or, in the case of TFSAs, tax-free growth and full access to their savings.

“TFSAs are an ideal vehicle to consider for topping up your discretionary retirement savings. You’re free to withdraw your money at any time, for whatever reason, with no restrictions or penalties,” says Ferreira.

“The benefits include the opportunity to save up to R30 000 a year and up to R500 000 over a lifetime, completely tax-free. This means you pay no tax on the growth of your savings, whether it’s in the form of dividends, capital gains or interest.”

TFSAs were introduced by the government primarily to encourage a culture of saving among South African consumers. Apart from promoting individual financial wellbeing, national savings can play a significant role in boosting economic growth and reducing dependence on direct foreign investment.

Ferreira emphasises that the funds in TFSAs should ideally be allowed time to mature and deliver returns to optimise the real benefit of compounding growth. The TFSAs are particularly efficient in building discretionary wealth, be it for a specific goal, education funds or even supplementing retirement capital, depending on your needs, goals and objectives.

“TFSAs appear to have struck a chord with South Africans, who generally struggle to save and stay free of debt. Early industry reporting of take-up of these accounts has been very encouraging.

“At Old Mutual nearly a third of the company’s TFSA sales were online, indicating that a younger, more digital-savvy audience are making use of this saving option.

“It’s significant too that a large percentage of the new TFSAs are recurring premium business, which illustrate a commitment to longer-term, on-going financial planning and savings,” says Ferreira.