Budget's impact on personal finance
13 March 2014
Posted by: Author: Fin24
The 2014 National Budget will have an impact on consumers' tax and retirement and Michelle Dubois, legal marketing specialist at Liberty explains its impacts on personal financial planning for the short and long term future.
Will I save tax this year?
There was the usual inflationary adjustment to the tax tables to reduce the effect of the so called "bracket creep”.
It effectively means that an inflationary linked salary increase will not push your income into the next tax bracket, which would increase your tax payable.
The tax relief will be seen in your end of March payslip, and whilst it may not be a lot of money, this is money that you never had before so make sure that it is put to good use.
For someone under age 65, earning R40 000 per month, the personal tax relief amounts to roughly R250 per month.
Use it to increase your payment to short term debts, allowing you to settle them quicker and reduce the impact of compound interest.
Another good alternative is to use the amount to increase your contributions to your retirement annuity. A small contribution now can make a big difference over time.
Making sure your retirement is on track
On March 1 2015, we will see the distinction between pension and provident funds fall away.
The new tax regime which will apply to all retirement funds (pension, provident and retirement annuity funds) will be effective, providing a deduction of 27.5% on the greater of remuneration and taxable income.
This also means that on retirement, pension and provident funds will be treated in the same manner and a maximum of one-third from both of these funds may be taken as a lump sum, with the balance being used to fund an annuity.
Finance Minister Pravin Gordhan has once again reassured the public that vested rights will be protected and if you are already age 55 or older, you will still be able to access your full provident fund on retirement.
In you are not age 55 by March 1 2015, but are considering retirement in the next few years, it is vital to assess the impact that these changes may have on your liquidity at retirement.
The budget further increases the tax-free amount on retirement fund lump sums from R315 000 to R500 000.
The aim is to benefit lower income earners who did not benefit from the tax deduction of saving into a retirement fund.
Retirement is a process and planning in advance will make sure that your post retirement plan meets your needs.
Withdrawal from a pension or provident fund prior to retirement
In certain circumstances it may be necessary for you to withdraw prior to retirement age.
As an example this could be a withdrawal from a preservation fund, an award in terms of a divorce order or accessing pension or provident funds in the event of change in employment.
The tax-free portion in the withdrawal tax table has been increased from R22 500 – R25 000 and the tax brackets have been increased by 10%, providing slightly greater tax relief.
However, you must remember that any amount taken as a withdrawal prior to retirement will impact your tax free portion on retirement.
Saving for a rainy day
For some time now, there has been talk of a tax preferred savings vehicle.
This will be launched in this tax year. You will be able to contribute R30 000 per year (subject to a lifetime max of R500 000 per individual) to this investment and all growth as well as proceeds will be tax-free.
The interest exemption will remain in place although we will more than likely not see this increase as it has in the past.
The value of a diversified portfolio should not be underestimated. Not only will you have a balanced portfolio in terms of your appetite for risk, but also use any tax breaks to maximum advantage.
Protecting your wealth
From March 1 2015, the premiums for income protection policies, which are designed to replace income in the event of your temporary or permanent disability, will no longer be tax deductible.
However, this will mean that when you claim, these proceeds will be paid tax-free.
The added bonus is that this legislation will not be backdated so if you previously claimed a tax deduction on these premiums, you will still receive the proceeds free of tax.
This article first appeared on fin24.com.