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He explains that the Act will result in contributions towards pension, provident and retirement annuity funds being viewed in the same light, with new limits to govern total contributions.

“Many people may have been wondering how the new limit will affect their own retirement contributions. Essentially, the new 27.5% retirement fund contribution limit is much more than what the majority of South Africans are saving today or what they can afford to save. The average RA savings contribution at Sanlam is around R800 a month and research via the annual Sanlam Benchmark Survey into retirement also shows people save only 14% on average through employer-sponsored funds.”

In fact, says Steenkamp, the latest Survey showed that 84.2% of retirement fund members interviewed contributed a total of less than R3000 per month towards retirement funding.

According to the BMR, more than 83% of people in SA earn less than R110k per year. For these people the changes will have no effect. At the other extreme they show that less than 1% of people earn more than R1.3m per annum. Only clients who earn more than this amount and who want to (and can) contribute more than 27.5% of their income will be affected by the new cap. It is therefore an extremely small portion of the population that will be affected by the cap.

Steenkamp plots two scenarios, one of a middle income earning individual and one of a high net-worth individual earning more than R1.5m a year.

  • An individual earning R20 000pm who saves 5% of his income through an employer-sponsored retirement fund as well as the maximum tax deductible 15% (R3000) through an RA, can still invest 7.5% or R1500 more when the new amendments kick in. This is likely more than what someone with this income will be able to afford.
  • Someone who earns R1.5m a year or R125 000 pm and who contributes a very healthy 22.5% of her income through an employer pension fund (at the higher end of what is possible in such funds) is still below the R350 000 deduction cap, leaving room to contribute R1000 more per month into an RA.

“Both of the scenarios reflect savings scenarios that are much higher than what the majority of people save for retirement. For a typical middle income person, it is almost impossible to invest 20-27.5% of his income - - given the likely level of his financial obligations,” says Steenkamp.

The new laws stipulate that the R350 000 cap includes items like Group Life and Disability income cover, but Steenkamp notes that, in most instances, these expenses are paid from the savings people allocate to their employer-sponsored fund.

However, if you are a high net-worth individual and your contributions already exceed R350 000 per tax year, Steenkamp suggests that you first consider contributing the maximum amount allowed to a tax-free saving account (TFSA).

Still, he says, an RA contribution in excess of what the cap allows remain beneficial. “Although the excess contribution won’t be tax deductible, the returns earned are still not taxable and you can withdraw the ‘excess’ contributions tax free when you retire.

“If you choose to reduce your contributions instead of exceeding the cap, you need to take into account how this may affect your retirement plan. You’ll need to either be prepared to adjust your standard of living downward at retirement or ensure the contributions above the R350 000 cap are directed into another discretionary savings product. Since this money can be accessed at any time you’ll need to be disciplined and make sure you don’t end up using that money for consumption purposes.”

Glacier Financial Solutions (PTY)LTD is a licensed financial services provider.
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