Tax reforms and you

HANNA ZIADY:  There was much said and written about the tax changes that came into effect on March 1 and the impact on retirement fund members specifically. But there does still seem to be some confusion around what the Tax Law Amendment Act has actually changed.

We are joined now by Michelle Acton, who is a principal consultant at Old Mutual Corporate Consultants, to shed some light on the topic for us. Michelle, thanks for your time today and welcome to the show.

MICHELLE ACTON:  Good evening, and thank you.

HANNA ZIADY:  Now, as I understand it, the tax treatment of pension funds, provident funds and retirement annuities was effectively harmonised under the new act and the tax deductibility of contributions across all of those different class of retirement funds has increased. Is that broadly correct, Michelle?

MICHELLE ACTON:  That is correct, yes. They used to be treated quite differently, depending on who you are employed by and what fund you had available, but you hadn’t got your tax deduction availability right. This has now changed from March 1 because now essentially what happens is with all funds, no matter whether you are on a pension fund, a provident fund or retirement annuity, your tax deductibility will be exactly the same.

HANNA ZIADY:  And what is that tax deductibility now?

MICHELLE ACTON:  Between your employer and yourself you can contribute up to 27.5% of your total remuneration. That has changed significantly because previously the deductions were based very much on pensionable salary. And also they varied across the different funds.

HANNA ZIADY:  Is that capped at all?

MICHELLE ACTON:  Yes, it is capped. It’s capped at R350 000. So if your contribution to the fund is more than R350 000 you can’t get that tax deduction. That affects a minority of the population because the majority of individuals would be able to take full advantage of the 27.5%.

HANNA ZIADY:  Absolutely. I’m certainly not contributing anywhere close to R350 000 a year to my retirement fund. What has happened now to the amount of money that fund members can take out at retirement?

MICHELLE ACTON:  Okay, that’s also a great question. Previously, if you were in a provident fund you could take all your money out in cash, but if you were in a pension fund and you had more than R90 000, you would not be able to take that out. Now that value has increased to R247 500. So what that means, whether it’s in your retirement annuity, your pension or your provident fund, when you reach retirement and there is less than R247 000, you can take the full amount in cash, If it’s more than that, of course, you can only take one-third in cash and the other two-thirds you have to use to buy a pension.

HANNA ZIADY:  Annuitise – or a living annuity as they call it. Of course, that was where all the drama was, but we won’t touch on that right now.

Let’s just touch briefly, Michelle, on why you think members should capitalise on these increased tax breaks.

MICHELLE ACTON:  The one thing for a lot of members to realise is that a lot of people’s contributions have been based on the previous tax deductions, not necessarily based on what their needs are. Now this increase gives us the opportunity that members can now work out how much I, based on my personal needs, probably should contribute along those lines.

The benefit, especially of using your employer’s retirement fund, is it is exceptionally cost-effective to save in a retirement fund compared to other unit trusts and other areas in terms of a cost perspective.

Second of all, everything you gain in that fund is completely tax deductible. So all the investment return earned in the fund doesn’t accrue tax either. So the money went in tax-free and it grows tax-free. From that aspect it’s hugely tax-efficient.

And I think one of the other aspects which has a huge benefit is that it is protected from creditors. So, if you have financial difficulties with creditors, any money in your pension, provident or retirement annuity is completely protected from that.

HANNA ZIADY:  Very hard to argue with those reasons.

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