South Africans should still consider retirement annuities (RAs) as a mechanism to neutralise the impact of taxes on their post-retirement financial goals, despite the fact that there was no significant increase in personal income taxes in the 2018 Budget.
Finance Minister Malusi Gigaba today left the marginal tax rate at 45% for individuals earning more than R1.5 million a year. Instead, the National Treasury plans to raise R6.8 billion from the personal tax system by limiting inflation relief for personal tax rebates. The lowest three personal income tax brackets and the primary, secondary and tertiary rebates will be partially adjusted for inflation with a 3.1% increase, while the top four brackets will remain unchanged for the fiscal year.
Errol Meyer, Head of Advisory Services at Standard Bank Financial Consultants, asserts that RAs are a tax-efficient savings vehicle that can help consumers stay on track with long-term financial planning goals. He points out that RAs are not only for retirement purposes; they are a tax efficient way of building up funds to finance your long-term future.
As of 1 March 2016, South African taxpayers were allowed to place as much as 27.5% of their earnings in retirement savings vehicles, and receive the full amount as a tax deduction, albeit in the current year or the following years of assessment. It makes sense to use this full tax-free allocation; taxpayers can even include any capital gains they are liable for in a particular year of assessment as part of the 27.5% tax deduction.
Current estimates indicate that only between 3% and 6% of South Africans can afford to retire, thanks to the country’s pitifully low savings rate. The so-called “sandwich generation” will be under particular pressure, because this section of the population - who are typically within 10 years of retirement - are responsible for supporting their own children while also caring for their aging parents. According to some research, approximately 50% of all South African adults fall into this “sandwich generation”.
Rather than fret about the tax burden, Mr Meyer says consumers should rather focus on improving their financial planning to meet their post-retirement goals. Apart from RAs, consumers can also take advantage of tax-free savings accounts as a means of gaining relief from taxes.
“The trick is to rewire rather than retire,” he says. “Instead of retiring from life, rather look at how you can rewire for new challenges, one of which will be planning for your financial wellbeing.”