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2012 Budget: Tax free savings and financial sector development






By Zamani Letjane, President, Institute of Retirement Funds


Given the backlash of the recessionary economic uncertaintities, the 2012 Budget presented by the Minister of Finance, Pravin Gordhan, has in the main to be applauded.  The Institute of Retirement Funds, welcomes the spirit of Ubuntu and active citizenry encapsulated in the budget, extending to all South Africans to play a role in macro-economic change, stability and sustainability.  The Budget on the whole remained steadfast in addressing the challenges of creating jobs, reducing poverty, building infrastructure and expanding the economy. The tax relief afforded to the lower end of the tax-payers (some R9b), no doubt provides an opportunity to save.


A key policy challenge facing SA is the lack of adequate retirement benefits for all due to the fact that there is allowance to cash in employer retirement savings when changing jobs and on divorce.    Most heartening from the Budget, the IRF states, is the vision and measures put in place to encourage domestic savings, with proposals for certain tax-free savings and investment plans. The expansive and ongoing problem of low savings levels amongst all South Africans is not a new phenomenon, says IRF, and government’s envisaged plan to make certain savings and investment plans tax free go a long to provide alternatives to the current tax free income groups.


The IRF agrees that this will encourage a new generation of savings products. This will encourage employees and the society in general, to save for their retirement and will in a long run, alleviate poverty.    Furthermore, the Minister noted that aggregate annual contributions could be limited to R30 000 per annum per taxpayer, with a lifetime limit of R500 000, to ensure high net owners don’t benefit disproportionately. Further adjustments that could help individuals save are the reforms proposed for retirement savings.


Contributions by employees and employers to pension, provident and retirement funds will be tax deductible by employees at a rate of 22.5 % for individuals below 45 years and 27.5% for those above 45. We applaud the Minister for this relief but would favour to achieve a tax-free retirement in future.


Annual deductions will be limited to R25 000 and R300 000 respectively and a minimum monetary threshold of R20 000 will apply to allow low income earners to contribute in excess of the prescribed percentages.  Non-deductible contributions (in excess of the thresholds) will be exempt from income tax only if, on retirement, they are taken either as part of the lump sum or as annuity income.  These amendments will come into effect on 01 March 2014. The IRF supports this move in that society would be encouraged to save.


Changes in capital gains tax will also affect the allure of SA to save their money by investing in capital interest.  The increase in capital gains tax inclusion rate from 25% to 33% contradicts the ‘saver friendly’ context of the budget to the detriment of asset owners.  As inflation erodes the value of any asset, it must grow and taxing this inflation protection becomes a disincentive to hold assets.


Although the maximum effective rate at which the tax is charged has gone up from 10% to 13.3% for individuals and special trusts, government has tried to limit the effect of the higher rates of the middle income earners by adjusting the amounts at which capital gains tax are payable by individuals.


From 01 March 2012 the annual exclusion amount at which no tax on capital gains is payable goes up from R20 000 to R30 000 and upon death of a person, the exclusion amount at which no capital gains tax is payable goes up from R200 000 to R300 000.


The budget emphasized the importance of private sector investment in building economic sustainability. On financial sector development, the much anticipated revised Financial Sector Charter Code will be gazetted for public comment, which the IRF will vehemently pass commentary on. 


The shift to market conduct supervision and the move towards the twin peaks system is welcomed for 2013.  This will place adequate focus on protecting the rights of consumers and ensure alignment to international best practices.


Government’s proposals for simplifying and modernizing procedures for cross-border investments in and out of SA will further strengthen relations with our neighbouring counterparts.


Disappointingly, the budget lacked the formal announcement of the government’s National Social Security Fund.  The lack of direction from government on this issue has left the industry in limbo and more solid proposals are longed for from government as they get their proverbial house in order.


The IRF is in agreement with the Minister that fees for products in the financial sector remain very costly, including saving products.  The present high level of fees contradicts the broader vision of government as noted above to encourage savings.  Projects like the Treating Customers Fairly project, which the IRF is involved with, will go a long way to ensuring more transparent savings and investments products. 


Whilst there were no concrete solutions to enhancing and monitoring governance of pension funds, in light of a series of fraud and corruption cases last year alone, the Minister did allude to the reforming of the retirement industry discussion papers that will be released this year to address good governance as a fundamental to pension provisioning.


Trustee Education and Communication within the pension sector did not receive a mention in this budget.  Being perhaps one of the most critical issues needing to be addressed given the changes in economic landscape, the need for tight governance and proper accountability, the Ministry must be urged to elevate these issues higher on the agenda.

In all, the budget permeated holistic macro-economic policy issues.  Government has acknowledged and embraces to an extent the savings plight in SA and this is most welcoming.  The IRF would however like to see in the next budget, a budget allocation to enhancing financial literacy education at school level, so as to groom a culture and society that is savings conscious.

Source: Institute of Retirement Funds
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