THE legislative changes and the retirement reforms proposed by the Treasury for next year are going to have a massive impact on anyone who has begun planning for their retirement.
The first major change is referred to as T-Day, on March 1, 2015. From this date, two significant changes are to take place. The first is that company contributions to retirement funds will be taxable. However, individuals will be able to obtain a tax deduction on contributions made – by the employer and employee – to a pension fund, provident fund or retirement annuity. The deduction will be limited to a maximum of 27.5 percent of taxable income a year, capped at an annual ceiling of R350 000.
While it has been possible to obtain limited tax deductions with regard to contributions made to a company pension fund, and contributions made to a retirement annuity fund, it never applied to the aggregate of contributions made to an individual’s various retirement funding schemes.
The second change of note is that the current rules at retirement will now apply to provident funds, pension funds and retirement annuity funds.
However, current members of provident funds will still be able to access all accumulated retirement savings in their existing provident fund and accumulated growth on these savings, accrued before March 1, 2015, at retirement date.
The new rules will only be applicable to accumulated retirement savings in provident funds after March 1.
Another major area of concern is referred to as P-Day and, although the date has not yet been finalised, its impact will also be significant.
The change here will be that the maximum amount you are able to withdraw from a provident or pension fund, pre-retirement, is likely to be significantly reduced from the current maximum of 100 percent. The government is clearly serious about encouraging individuals to save for their retirements.
Confusion
By introducing reforms that ensure individuals are required to channel a larger portion of their savings into compulsory products, the Treasury is making certain that people are less likely to “waste” their retirement money in the here and now.
The ideal retirement plan, naturally, involves adopting a portfolio of investments that balances compulsory contributions with those that are discretionary.
Developing a holistic wealth structure plan – one that encompasses offshore investments, discretionary, and compulsory assets is the ideal, but doing so effectively is beyond the average person’s capabilities.
Planning such a holistic wealth structure requires the hand of an expert who can help in striking the right balance between these various types of investments.
Financial planning is not something you should do alone; speaking to a skilled professional who is knowledgeable about this sometimes confusing arena will allow you to arrange your current and future financial planning to best suit your needs.
There is no doubt that this new legislation will benefit the economy and the people in the long run, as it will strongly encourage higher retirement savings rates among the majority of the population, while at the same time helping to lock those savings in until retirement age. Moreover, it will also encourage more people to obtain financial advice that is relevant to their needs from the experts.
This will further assist individuals in improving their financial security and extracting the largest possible benefits from these changes.
While the changes may take some getting used to, they will clearly be beneficial to the majority in the long run.
Of course, regardless of the state of your personal retirement planning, it is always worth it to learn more about the pending legislation and the opportunities that new legislation makes available.
Alex Cook is the chief executive of GCI Wealth.