Pension Plain: how the latest Budget Speech benefits South African taxpayers

Christmas came early for South Africans this year in the form of announcements made during the latest Budget Speech. "Santa" Godongwana arrived with his signature hat on his head to deliver gifts that put a smile on the face of many a tax-paying South African by lowering their income tax bill and by increasing tax incentives for retirement fund members and investors. The “saving saints” were rewarded while the “smoking and drinking sinners” were punished by the increase in the tax on their recreational pleasures. 

For the first time in three years, the tax scales were adjusted for inflation. This means that those of us who are lucky enough to receive inflation-linked salary adjustments this year will not see a substantial portion of those adjustments going towards income tax. Primary, secondary, and tertiary tax rebates were also adjusted. This means that the monthly tax-free income for a person under the age of 65 years moves up to R8 250, up to R12 770 for a person between the ages of 65 and 75 years, and up to R14 275 for persons over the age of 75 years.

In addition, “saving saints” receive two significant adjustments. Firstly, the annual maximum tax deduction on retirement fund contributions is increased from R350 000 to R430 000. The new maximum amount will benefit higher earners (earning more than R1 272 272 per annum in taxable income) who were previously limited to a total contribution of R350 000, as the new limit of R430 000 will now, as 27.5% of taxable income, be reached at an annual taxable income of R1 580 882. The 27.5% of taxable income limit is retained.

The comparison below explains how Ms Y’s decision to contribute R430 000 per year towards her retirement fund will reduce her taxable income and enhance her future retirement outcomes compared to Mr X, who decides to keep his contribution rate at R350 000 per annum:

From the above, it is clear that Ms Y funded the additional R80 000 retirement fund contribution with R32 800 that she would have paid to the tax man, and took some short-term pain by reducing her take-home pay by R47 200 that year. In ten years from now, that R80. 000 additional retirement fund contribution will grow to about R207 000, and in twenty years to about R538 000 if the fund achieves an investment return of 10% per year.

Secondly, the annual tax-free investment limit is increased from R36 000 to R46 000. That extra R10 000 per year might not sound like a lot of money, but it can reduce the period you have to get to the R500 000 overall tax-free savings limit from about 14 years to about 11 years and have a considerable influence on your long-term investment outcomes.

Example: 

Mr X invests R500 000 at R36 000 per year over a period of 14 years into a tax-free savings account, while Ms Y invests R46 000 per year to reach the R500 000 mark in 11 years.

By investing R500 000 over a shorter period, Ms Y has about R175 000 more in her tax-free investment account than Mr X after ten years and R240 000 more after twenty years.

Santa Godongwana has done his job by placing the gifts of saving under our investment Christmas trees. We must now decide to open those gifts and use them to ensure better future retirement and investment incomes, or to let them lie unused while we complain about the income tax we pay and how it is impossible to achieve better retirement outcomes.

* Ladouce is a pension funds lawyer and the author of the book, Pensions for Palookas.

PERSONAL FINANCE