Retirement savings season

RETIREMENT SAVINGS SEASON

Most of us have dreams of an idyllic retirement where we finally get to kick our shoes off after a long career of hard graft.  Some may dream of retiring to a beach cottage, whilst others may look towards the mountains, yet is almost certain that the dream involves enjoying the fruits of one’s labour.  The sad reality though is that very few of us will ever reach our dreams.  An often quoted statistic is that only 6% of South Africans will be able to retire comfortably, with the ability to maintain a similar level of lifestyle as they enjoyed before retirement.  This very low statistic should be an indicator of how difficult a comfortable retirement is to achieve.  In this month’s Financial View we look at the tax incentives in place to encourage savings for retirement.

As we mentioned in the introduction the chilling statistic is that the vast majority of South Africans will not be able to retire comfortably.  This may force some people to continue working well beyond normal retirement age.  Others will be partially or fully dependent on their children for maintenance through their retirement.  And finally a large percentage will apply to the government for a social grant in the form of the Older Persons Grant.  Currently the state will pay you an amount just shy of R2k per month as a grant.  This may appear to hardly be a liveable wage but due to the sheer number of retirees on the Older Persons Grant it places the income statement of the government under tremendous pressure.  For this reason, the government provides incentives for taxpayers to look after their own retirement savings.

The South African tax year ends February each year.  The Income Tax Act provides for a number of annual allowances that are granted on a “use it, or lose it” basis with no carry forward from one tax year to the next.  Some of the annual allowances that are granted for taxpayers to increase their wealth include:

ever receives equivalent value to the same amount as the taxes that they paidWith appropriate financial advice one would be making use of all these allowances each and every year.  Each one of them could warrant their own article, but in this article we will just focus on the contributions to retirement savings.

Your retirement savings is your most tax efficient form of investing.  We make this statement because you receive both a tax deduction on contributions, and the retirement savings grows free of tax with no taxes paid on interest, dividends, rental or any other form of income.  The tax deductibility of contributions is legislated as “The deduction is limited to 27.5% of the greater of the amount of remuneration for PAYE purposes or taxable income (both excluding retirement fund lump sums and severance benefits). The deduction is further limited to the lower of R350 000 or 27.5% of taxable income before the inclusion of a taxable capital gain.”

Any excess contribution is not deductible and thus it is recommended that contributions are no greater than 27.5% of taxable income but limited to R350 000 each year.  The R350 000 is one of those allowances that you lose if you don’t use it.  Excess contributions are carried forward to the next tax year so can still enjoy future deductions.

So if taxpayer A contributes R5 000 per month to their retirement savings (R60k pa) the unutilised portion of the limit of R290 000 falls away, never to be available to taxpayer A again in their life time.  The predominant reason to maximise contributions to retirement savings is to reduce your taxable income and your tax obligation to the state.  With the South African fiscus so reliant on such few taxpayers no taxpayer ever receives their value’s worth of taxes that they paid.  Taxpayers are effectively paying for other people to receive grants and a large public service to receive salaries, very little benefit is enjoyed by the very person whose wallet is a little lighter.

We always ask would you rather be paying more money to the government or would you rather have the funds in an account in your name.  Almost seems a no-brainer…….

For contributions to retirement savings (whether pension funds, provident funds, or retirement annuities) to reflect in the current tax year they need to be received by the financial institution before the end of February (this month, and hence Retirement Savings Season).