Publications
Partners
While the hype surrounding the tax laws changes implemented on 1 March 2016 may have subsided, the fact remains there are now measures in place to assist and encourage individuals to save more for retirement.
Retirement fund members need to take responsibility and educate themselves about these new laws in order to maximise retirement savings.
One of the main benefits of these amendments is that members of company retirement funds can now contribute more into their fund every month, which can significantly boost their retirement savings.
With the new tax laws surrounding retirement funds, members’ retirement contributions are now tax deductible up to a maximum of 27.5% of either their total remuneration or taxable income – whichever is greater.
Retirement fund members should be capitalising on this tax break to save more for retirement. While the amount you need to save to enjoy a comfortable retirement will depend on your personal circumstances, it is recommended that any fund member should aim to save enough to ensure that they receive around 70% to 75% of their salary as a pension once they retire.
To achieve this target, fund members should invest at least 15% of their monthly income over their working lifetime from the age of 25. This is however the minimum, and will vary depending on different scenarios and circumstances.
Here are five reasons why members should use their retirement fund to boost their savings and ensure a comfortable retirement.
1. It’s tax efficient
- The new tax laws mean payments into a fund are tax deductible up to significantly increased limits (27.5%)
- Tax breaks on lump sum cash portion taken at retirement
- Contributions that aren’t deducted from tax can be used to reduce the amount of tax on the lump sum at retirement, and even on the pension income.
2. The growth on retirement investments is tax free
Individuals who invest their savings outside of retirement funds or tax free savings vehicles are subject to a number of different taxes on the growth of the investments:
- Interest earned on cash and fixed interest investments is taxed as income,
- Dividends earned on shares are taxed and the investment manager must withhold this tax
- Any capital gains earned when the investments are finally cashed out are taxed.
The investments in a retirement fund are free of all of these taxes, which significantly boosts growth over the long term.
3. It’s cost effective
Fund members pay lower investment and administration costs than they would if they tried to save the same amount outside of their fund.
4. There’s no estate duty on retirement investments (with the exception of undeducted contributions)
Broadly speaking, when an individual dies and their net estate is more than R3.5m, their estate is taxed at 20% before the proceeds are paid to their heirs. Retirement fund savings are excluded from the individual’s estate and do not attract this tax.
5. Retirement fund savings can’t be touched by creditors
In the event that an individual is unable to meet their debt obligations or is declared insolvent, all their assets with the exception of their retirement fund savings and certain long term policy benefits (as set out by s63 of the Long Term Insurance Act) can be attached by creditors.
How much should you be saving to retire comfortably?
Assuming a moderate investment return of inflation plus 4% and a retirement age of 65. Also assumes that no withdrawals are made prior to retirement and that member receives salary increases at the rate of 1% above inflation.
* Romeo Msipha is Senior Consultant of Old Mutual Corporate Consultants
