The Budget and Retirement Savings

The Budget and Retirement Savings

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At the beginning of this year there was an outcry when Bishop Tutu suggested there should be a wealth tax for whites only. But, from my perspective, this budget has proved tantamount to a wealth tax for all.

I fully understand that Pravin Gordhan had to make some difficult calls. He needs to protect our country and ensure he keeps the budget deficit as low as possible. He also had to satisfy a broad range of competing exigencies. So on this I’m giving him a gold star.

My clients expect me to advise them appropriately, based on their individual needs and investment portfolios so, here, macro issues play no part. It’s also a fallacy that the high income earners in this country have a great deal of disposable cash as they shoulder the burden of most of the country’s taxes. This doesn’t come cheaply and it’s not hard to understand why many big earners have very little money left.

Reality check

I believe that the cornerstone of a prosperous country, apart from its citizens being economically active during their working lives, is that they save for their golden years and don’t become a burden on the State.

Let’s examine what has been implemented and what will impact on savings.

  • Capital gains tax was introduced on 1 October 2001 remaining unchanged until now. Currently, with the increase for individuals from 25% up to 33,3%, the marginal tax rate has increased from 10% of the gain to 13,3%. Companies now pay 18,6% and trusts 26,7%. This will affect retirement savings outside formal retirement plans because the gains will be taxed at higher levels.
  • Local dividends will be taxed at 15% (not 10%). This increase places investors in a totally different position from prior to its introduction as, initially, it was thought that the increase would be neutral. Investors’ dividend income will now be reduced by 5% and, again, this will have a negative effect on retirement savings. There is also no guarantee that companies will pass on the previous STC as a dividend.
  • On the positive side for all investors with funds offshore, foreign dividends will now be taxed at 15%. Previously offshore dividends were taxed at your marginal rate.

Additional changes

I was surprised that for the first time in many years, there was no increase in the interest abatement tax which still stands at R22 800 for under 65s and R33 000 for over 65s. Surely an inflation adjustment should have been granted.

Changes in medical deductions to tax credits for those under 65 will wipe out minor increases in tax savings at higher earnings levels. For this reason, there isn’t going to be much more available from tax savings to invest for retirement and, even the slight savings you may make, will be absorbed by the increase in petrol prices and tolls. Unfortunately, if the changes to medical aids for those over 65 are implemented, people in retirement will need to have yet more money saved to pay for some of their medical expenses, which may not be tax deductible. We will receive more information about this in the 2013 budget.

There’s one other big positive in the budget relating to formal retirement plans, including retirement annuities. Prior to the budget, the advantages of a retirement annuity were as follows:

  • Tax deductibility on contributions up to 15% of taxable income
  • Retirement annuities don’t form part of your estate
  • No capital gains tax — paid by the fund
  • No tax paid on interest earned
  • No fixed retirement date.

Following the budget, dividends received by retirement annuities will not be taxed and, although outside retirement annuities CGT has gone up, it has no impact on the retirement fund.

On a final note, I am greatly concerned that SARS appears to have opened the door to increase various taxes in the coming years, and this could impact on future savings for retirement.

Bryan Hirsch
BRYAN HIRSCH has been in the financial services industry for 47 years and is a director of Bryan Hirsch Colley & Associates. He has written two books, the first Bryan Hirsch’s Guide to Personal Finance and more recently, Steps to Financial Freedom. Bryan has written for many of South Africa’s top financial and business publications, has been a weekly guest on Radio SAFM for 18 years, and has his own weekly TV show You & Your Money on Summit TV.