Retirement fund tax challenges for high income earners
Mark Goulding As part of the retirement reforms changes are proposed to the tax deductions available to high income earners that will have a significant impact on their ability to save for retirement.
The preamble to the announcement states “to encourage South Africans to save for retirement” and then the changes promptly act as a disincentive for high earning taxpayers to save.
The proposal is for a taxpayers contribution to a retirement fund which will be allowed as a tax deduction to be capped while currently there is no cap on the maximum contribution. The effect of the cap would be to limit the deduction of future contributions to an earnings cap of around R1,1m.
Putting this into numbers, if you were a taxpayer over 45 years old who had R2m in taxable earnings and you contributed 15% and your employer contributed 7,5%, you would have paid R450k into your retirement fund pre tax. In future your deduction would be capped at R300k and the balance of R150k subject to tax resulting in more than R55k in additional tax being payable if you continued the same contribution level.
Why would one want to continue to contribute at this level if it resulted in an additional R55k in tax being payable?
But there is more, proposals are in the line to restrict the amount that can be withdrawn from retirement funds by limiting the lump sum to 1/3rd. Add to this the reduction in the maximum annuity percentage announced a few years ago (from 20% to 17%) and a taxpayer is faced with a forced saving regime, with additional restrictions and increased tax costs.
How can this be seen to be encouraging high net worth South Africans to save?
I can foresee a significant drop off in contributions to retirement funds for high income earners.
