While the hype around the tax laws and their effect on retirement fund members may have subsided, the fact remains that, as of March1 this year, measures were implemented to assist and encourage individuals to save more for retirement. According to Romeo Msipha, senior consultant of Old Mutual Corporate Consultants, retirement fund members need to take responsibility and educate themselves about these new laws in order to maximise retirement savings.
Msipha says that one of the main benefits of these amendments is that members of company retirement funds can now contribute more to their funds every month, which can significantly boost their retirement savings.
“With the new tax laws surrounding retirement funds, members’ retirement contributions are now tax deductible up to a maximum of 27.5percent of either their total remuneration or taxable income – whichever is greater.”
He explains that retirement fund members should be capitalising on this tax break to save more for retirement. “While the amount a fund member needs to save to enjoy a comfortable retirement will depend on each person’s personal circumstances, it is recommended that any fund member should be trying to save enough to ensure that they receive around 70 to 75percent of their salary as a pension once they retire.
“To achieve this target, fund members should invest at least 15percent of their monthly income over their working lifetime from the age of 25. This is, however, the minimum, and will vary depending on the different scenarios and circumstances.”
Msipha provides five reasons why you should use your retirement fund to boost your savings to ensure a comfortable retirement.
1. It’s very tax efficient
The new tax laws mean payments into a fund are tax-deductible up to significantly increased limits (27.5percent).
There are tax breaks on the lump-sum cash portion taken at retirement.
Contributions over the limits that aren’t deducted from tax can be used to reduce the amount of tax on the lump sum at retirement, and even the tax payable on your pension.
2. The growth on retirement investments is tax-free
People who invest their savings outside of retirement funds or tax-free savings vehicles are subject to a number of different taxes on the growth of the investments over and above the relevant thresholds and exemptions provided for in the Income Tax Act:
•Interest earned on cash and fixed interest investments is taxed as income;
•Dividends earned on shares are taxed and the investment manager must withhold this tax; and
•Any capital gains earned when the investments are finally cashed out are taxed.
The investments in a retirement fund are free of all of these taxes, which significantly boosts growth over the long term.
3. It’s cost effective
Fund members pay lower investment and administration costs than they would if they tried to save the same amount outside of their fund.
4. There’s no estate duty
Broadly speaking, when you die and your net estate exceeds R3.5million, the estate is taxed at 20percent before the proceeds are paid to your heirs. Retirement fund savings are excluded from your estate and do not attract this tax. (The exception is that estate duty does apply to contributions in excess of the tax-deductible limits.)
5. The money can’t be touched by creditors
In the event that an individual is unable to meet their debt obligations, or is declared insolvent, all their assets, with the exception of their retirement fund savings and certain long-term policy benefits (as set out by section 63 of the Long Term Insurance Act), can be attached by creditors.
EXAMPLES OF WHAT YOU WOULD SAVE
For a taxpayer earning R200 000 a year
The taxpayer saves 15 percent of his/her annual salary in a:
Discretionary investment
Monthly salary: R16 667
Less monthy tax: R1 960
Monthly take home pay: h R14 707
Monthly savings at 15% of R16 667: R2 500
Monthly spending money after savings R12 207
Total savings after 30 years after tax on interest and dividends: R1 881 720
Monthly pension purchasable with this amount: R9 224 (after tax)
Retirement fund
Monthly salary: R16 667
Less pension fund contribution: R2 500
Less monthy tax: R1 425
Monthly take home pay before retirement fund savings: R15 242
Monthly spending money after savings: R12 742
(R532 more a month than if you save in a discretionary investment)
Total savings after 30 years with no tax on interest and dividends: R2 039 483
Member takes R500 000 tax free on retirement
Monthly pension purchasable with remaining amount: R7 547 (after tax)
Monthly income taxpayer can buy with R500 000 investment: R2 450
Total monthly pension: R9 996
The additional R532 a month “spending money” invested in an at least inflation-matching investment for 30 years could yield an additional R191000, which could provide an additional R1 333 a month net of tax and a final income of R11 329.
For a taxpayer earning R600000 a year
The taxpayer saves 15 percent of his/her annual salary in a:
Discretionary investment
Monthly salary: R50 000
Less monthly tax: R12 830
Monthly take home pay: R37 170
Monthly savings at 15% of R16667: R7500
Monthly spending money after savings: R29 670
Total savings after 30 years after tax on interest and dividends: R5645160
Pension purchasable with this amount: R27672 (after tax)
Retirement fund
Monthly salary: R50 000
Less pension fund contribution: R7 500
Less monthly tax: R10 005
Monthly take home pay before retirement fund savings: R39995
Monthly spending money after savings: R32 495
(R2 825 more a month than if you save in a discretionary investment)
Total savings after 30 years with no tax on interest and dividends: R5 920783
Member takes R500000 tax-free on retirement
Monthly pension taxpayer can buy with remaining amount: R22 552 (after tax)
Monthly pension taxpayer can buy with R500000 investment: R2451
Total monthly pension: R25 003
The additional R2 825 a month “spending money” invested in an at least inflation-matching investment for 30 years could provide an additional R2.3 million, which could provide R10 239 a month net of tax and a final income of R35241.
Assumptions: A five-percent real return, net of fees (but after tax on interest and
dividends, where applicable). Investment switches do not incur capital gains above the annual R40000 CGT exclusion threshhold. The taxpayer retires after age 65 and is entitled to the secondary rebate. Conservative income provision calculation used throughout – actual rates may be higher and will depend on several factors such as your risk tolerance and whether you are a man or a woman.