Retirement savings vulnerable to tax hikes

Tax increases are on their way and the question is which tax types and by how much? Many will undoubtedly feel they should have planned better.

Taxpayers with pre-tax retirement savings may be vulnerable for two reasons.

1. The table below shows the top marginal tax rates for retirement lump sum withdrawal and personal income tax.

Where the differential in 2013/14 was only 4%, it now stands at 9%. During the past years, the top personal income tax bracket more than doubled from R638 600 to R1 500 000. Conversely, the top retirement tax bracket only moved 16.67% (from R900 000 to R1 050 00). These signal strong markers.

2. Retirement tax reform takes full effect on March 1, 2018. This means compulsory preservation on retirement funding not previously accrued. The fiscus, arguably correct for those vulnerable to premature retirement withdrawal, doesn’t want encashment of retirement savings. An increase in tax rate will be consistent with this policy direction, thus making the encashment decision expensive.

Alternatives

The difficult position for taxpayers, and their financial advisors, is not having the benefit of hindsight. While it would almost always be a bad idea to leave employment just to access retirement funding, the following options should be given careful thought: Preservation funds. This is previous employment retirement funding saved and not yet taxed.

We’ve seen many employees withdraw these funds and taking the tax hit. The money is often invested offshore as part of diversification and giving currency hedge.

Financial emigration. There are many South Africans abroad with retirement savings and investment locked-up in SA. The financial emigration process remains the sole formal Sars and Reserve Bank process to confirm nonresidency status. Once formally emigrated, the expatriate may elect, but doesn’t compel, the encashment of retirement annuity funds.

We’ve often seen the logic to rather suffer a tax now, than being vulnerable to future adjustments.

Coupled with a possible future economic downgrade, the rand will probably not strengthen.

These are uncertain times from a tax policy perspective and we only hope that the Presidential Fiscal Committee makes good decisions for all South Africans.

Jerry Botha is managing partner at Tax Consulting SA