Dashed hopes on tax-free savings
Overall, the budget offered very little for savers and investors
Budget day. I’m a money nerd so this is exciting. As the 2pm start approaches I am refreshing the National Treasury website to download the speech while watching the TV and waiting for the broadcast to start. As the minister approaches the podium, poof. Everything goes dark — we’ve been load-shed. So I watch on my phone.
Truthfully, for savers and investors the budget speech was worth missing — it offered very little.
The “no surprise” was around the proposed “two-pot” pension system. When enabled, this will let those invested into a regulation 28 scheme draw up to a third of their pension early, but as expected this was delayed until March 2024.
The sticking point is not the concept; this has been settled and when it is introduced new monies deposited will be split into two pots: one-third into a savings pot and the rest into an investment pot. You will be able to withdraw from the savings pot, paying tax on withdrawals at your marginal tax rate.
The sticking point concerns the seeding of existing invested regulation 28 funds into the “two-pot” scheme. So we wait another year while this gets sorted out. Born out of the pandemic when many people were quitting to access their pension money, the idea is solid and over time will be a great benefit. But in the initial years the amount deposited will be modest, so the savings pot will take some time to grow, hence the seeding issue.
We also saw no changes to the regulation 28 contribution deductions limits of R350,000 or 27.5% (whichever is smaller). However, the tax-free withdrawal from a regulation 28 fund at retirement has been increased 10% from R500,000 to R550,000.
I was expecting an increase in the annual limits on contributions to tax-free savings accounts. But nope, the limit remains at R36,000 per individual per year, and the lifetime limit of R500,000 also remains in place.
The annual limit started at R30,000 in the 2016 tax year, was increased to R33,000 in 2018 and then hiked to R36,000 for the 2021 tax year. Spot the trend? An increase every two or three years, which is why I expected (hoped for?) an increase to R40,000 this year.
This would have been an easy win for the minister. Tax-free contributions are funded with post-tax money, so it would have very little impact on collections for now, though we do avoid dividend withholding tax and capital gains tax. But the amounts are modest in the bigger scheme of things.
There was, however, good news for civil servants in that the Government Employees Pension Fund (GEPF) remains fully funded. which for a defined benefit fund is critical. Here the key wording was: “The GEPF remains solvent, with the latest statutory actuarial valuations showing that its assets exceed its best estimate of liabilities.” Fair enough, this is always an actuarial valuation as nobody knows the future, but the GEPF has a good track record of being fully funded.
Importantly, the old-age grant will rise R90 from April and another R10 in October. This is an increase of just over 8%, which is not bad given that inflation has been running at more than 7% for much of the past year. But the official inflation rate is never the reality we experience markedly higher personal inflation, especially on transport and food.
All in all, this budget held nothing much for savers and investors, but in a tough economy, and with GDP barely growing, my wishful thinking was always likely to be just that.