Higher Income Earners penalised in recent budget
The national budget released earlier this year was well received from a savings perspective, with attempts to kick start savings at lower income levels and working towards a “preservation of savings” culture. However, embedded within the presentation lurked a few surprises for the retirement industry and for investors.
Pleasing was the extension of the percentage of taxable income earnings that can be saved annually into a retirement annuity fund to 22.5%, which comes into effect as of 1 March 2012. If we want to get really serious about addressing our dire national savings rate, this is a very supportive measure. As our economy recovers, many South Africans will find themselves with renewed capacity to squirrel away those all important savings towards their retirement years, so for many and particularly for those in the lower earnings categories this represents a meaningful opportunity.
For young professionals this further tax concession should be seen as an excellent opportunity to ensure that adequate savings are being made in the early years of their careers. Of course, capital invested in those early years will benefit from more years of compounded returns, thereby providing further opportunity to build up healthy capital for the later years.
For the higher earners of society, however, of which professionals comprise a large proportion, the introduction of a maximum tax deductible contribution of R200,000 per annum will be keenly felt. Effectively anyone earning more than R888,000 per annum who would want to contribute at the 22.5% level will exceed the new maximum tax deductible contribution and will not receive tax relief on all of their contribution.
Although this approach to income transfer from the wealthier to the poorer is aligned to our broader social security system it presents a non-too-subtle message to the higher earning professionals who are largely the drivers of our economy. The bottom line is that there is simply going to be less attraction to invest to the maximum contributable amounts because of the new tax liability.
We anticipate that higher earners will continue to contribute their R200,000 per annum level in their retirement funds but that many will channel the additional savings which will effectively be “after-tax” funds into other discretionary products that are less restrictive in their investment rules than Retirement Funds.
This could mean that individual financial plans that until now may have been single product plans with a Retirement Fund as the sole product will now begin to feature second or third products.
The worry here is that investments that would previously have been invested safely into highly-regulated Retirement Funds might now be partially invested in an unregulated environment and be susceptible to irresponsible fees or strategies. On a further cautionary note purveyors of unregulated investment schemes present the promise of returns that are often ‘too good to ignore’ but always ‘too good to be true’. Sadly, professionals have over the years been a favourite target market for some of those operators, and it would be tragic if an unintended consequence of this new legislation gives rise to further losses in such schemes.
For younger investors the incentive to delay gratification and save that little bit more each month has been increased by the recent budget, which can only be a positive. However, for those higher earners it is important to remember not to use this development as a reason to rush into risky investments.
These limitations apply from 1 March 2012, which adds additional importance to financial planning for higher earners in the current year.
All material subject to our Legal Disclaimers.