Historically, South Africans don’t save as much money as they should. The result is that many approach the end of their working lives with not enough funds to support their lifestyles. Rather than making excuses about inflation, the cost of living and other reasons for their lack of financial foresight, they should be looking to the national budget, delivered yesterday, for information on how to kick-start savings.
Use a Financial Planner to increase savings
After listening carefully to what Minister Pravin Gordhan had to say, people should call in the services of a trusted financial planner to help create the mechanisms they need to have a fuller life when retirement looms, says Errol Meyer, Head of Advisory Financial Consulting at Standard Bank.
“Government has long been concerned about the nation’s low saving rate. They have translated this concern into action and have provided two major mechanisms for people to get saving and save tax at the same time, i.e. Retirement Annuities and Tax-Free Accounts. And now, with yesterday’s Budget speech, the Minister of Finance has made these savings incentives even more attractive.
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“It is important to digest what was said in the Budget and to convert into actions that support the goals that need to be achieved,” says Mr Meyer.
Long-term investors be aware
A notable change for those looking to invest more over the long term is the annual allowance for tax free savings accounts has been increased to R33 000. Tax-free savings accounts were introduced on 1 March 2015 with an initial annual allowance of R30 000.
“This is an excellent savings vehicle to attain lifestyle goals after retirement, or goals such as education for children, overseas holidays and to attain the lifestyle you are accustomed to. This increase raises an expectation that this allowance may be raised in line with inflation in the future,” says Meyer.
“Both these tax-efficient solutions have major roles to play in using savings as a base for personal financial planning. Retirement annuities are long-term schemes that enable investors to save for retirement. On the other hand, TFIA’s make it easier to save for the present. Investors can invest anything up to R 33 000 a year, up to a maximum of R 500 000 over the investor’s lifetime, and not pay tax on the interest.”
“To promote RA’s as a ‘lifetime savings habit’, in 2016, the Minister announced that the limit on tax-free retirement fund contributions would be moved to 27.5% of the greater of remuneration or taxable income. Salary earners will benefit from the remuneration ‘leg’ rather than the taxable income ‘leg’. Contributions up to a maximum of R 350 000 a year qualify. The build-up in the fund is tax free and contributions are tax deductible until a person chooses to retire after the age of 55. Both employed people and those who are self-employed can take advantage of this benefit.”
“This means is that if you are a young, dedicated saver, you could contribute to an RA for decades and reap considerable benefits,” says Mr Meyer who stresses the other main advantages of RA’s as being that:
- Investors are free to add additional funds into an RA above the present limit of 27.5% without incurring any kind of penalties. Disallowed contributions may be claimed at and after the date of retirement.
- All savings within an RA or pension fund are tax free;
- An aggregate of R 500 000 in retirement funds, including pension and provident funds can be taken tax-free after retirement.
On retirement, after a cash withdrawal, the RA ensures that a compulsory monthly ‘living’ or traditional annuity is paid in the form of a pension to the holder. Although this is taxable, the tax rate should be lower than the rate previously paid by the individual. People should consult a financial adviser to make an informed decision based on their personal circumstances when choosing a compulsory annuity.
Family trusts, meanwhile, are still a viable option but it must be done for right reasons and not be tax driven.
Taxpayers belonging to a Trust can make donations of up to R 100 000 a year without attracting donations tax. This can increase the assets of a Trust whilst reducing the dutiablevalue of a personal estate. At the moment all taxpayers are entitled to an annual exclusion of R40 000 on capital gains earned during the year.
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“Capital Gains Tax (CGT) is increasingly being used to gather tax. It impacts on the profits accrued through the sales of equities as well as through assets like houses. The fact that there was no increase in inclusion rates in 2017/18 does not mean CGT did not increase effectively – CGT did increase when you dispose of assets as the marginal rate increases therefore the effective CGT increases from 16.4% to 18%. It can also catch those who are unprepared by adding to tax charges paid on an estate,” says Mr Meyer.
“Regardless of whether you are a new entrant to the world of financial planning, or consider yourself financially mature enough to make decisions without help, it is wise to get professional help when taking advantage of the tax breaks to help save.”
“Legislation and benefits change. Keeping track of all these events is what professional advisers do and not making use of their service could prove to be penny-wise and pound foolish,” says Mr Meyer.