Are retirement annuities the new trusts?

SADLY, as much as Finance Minister Pravin Gordhan is the hero in the fight to save the Treasury from dark and corrupt Zupta forces, his latest budget speech was quite disastrous in several ways. One of them involves tax on trusts.

Until recently, it was financially viable for South Africans and foreigners to register a trust in South Africa. For estate and succession planning, trusts are critical.

But as of this year, with the imposition of higher taxes, South Africa has become pretty much the only developed nation where it is pointless to register new trusts. It is hard to see any benefit in registering a new trust.

There are only financial penalties in the form of higher tax, which has risen over the past three years from 40% to 41%, and now a staggering 45%.

This extra burden will discourage people from forming trusts.

Gordhan’s move was very smart from a fiscal perspective as he has effectively purchased the fiscus a future tax revenue from future increased estate duties.

However, from an estate and succession planning perspective, we have shot ourselves in the foot.

The very real effect from a purely financial, retirement, estate and tax planning perspective is:

ý No South African or foreign national would be crazy enough to register a South African trust. Long-term wealth creation will now be handled offshore in more tax/trust-friendly places.

ý Crucially, there is now only one absolutely effective vehicle for tax, retirement, estate and succession planning, that being your retirement annuity. This is why:

ý It will provide you with an upfront rebate and an ongoing tax benefit as it has 0% internal tax and is Capital Gains Tax exempt.

ý It provides a secure retirement income anytime from 55.

ý Due to allowing beneficiaries, it is not included in your estate, so is free from the 20% estate duty.

Not only that, it is not even part of the estate process as it automatically transfers to your dependents, therefore making it an exceptionally good estate and succession planning tool.

The crucial lesson here is that no matter how well you think you had your overall portfolio structured, this latest budget was a game-changer.

If you think you had everything covered, it is certainly advisable that you now speak to your financial adviser.

It is only when the tide goes out that you realise who is swimming without pants.