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Wealthy earners’ retirement dilemma

Friday, 12 February 2016   (0 Comments)
Posted by: Author: Ingé Lamprecht
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Author: Ingé Lamprecht (Moneyweb)

Tax deductible contributions to retirement funds to be capped at R350 000 from March 1.

The tax harmonisation of retirement funds will also see the introduction of a cap of R350 000 per annum on deductible contributions to pension funds, provident funds and retirement annuities on March 1.

This means that a number of high net worth individuals (HNWIs) who previously contributed in excess of R350 000 to retirement vehicles and who were able to deduct the full contribution from their taxable income, will now see the deductible portion of their contribution capped at R350 000. As a result, their take-home pay will reduce.

Kobus Hanekom, head of strategy, governance and compliance at Simeka Consultants and Actuaries, says the new cap may not be good news for fund members who contribute more than R350 000 per annum. This would generally include members who earn more than R1.27 million per year and who contribute 27.5% or more of their remuneration to a retirement vehicle.

A HNWI who earns R5 million per annum and who could previously claim a R750 000 contribution (15%) to a retirement annuity as a tax deduction, will now see the tax deductible portion of the contribution capped at R350 000.

These individuals may face some tough choices. Do they continue to contribute the same amount or explore other investment options?

While the actual number of people who stands to be affected by this requirement seems to be fairly small, the repercussions could be significant.

Data from the South African Revenue Service (SARS) show that 1 383 taxpayers contributed more than R350 000 to a retirement annuity in 2014. With regard to pension fund contributions, almost 60 individuals exceeded the cap during the same tax year. Contributions by employers are not reflected in the latter figure as these contributions are only taxed as fringe benefits in the hands of employees from March 1 this year, Sandile Memela, executive for media and public relations at SARS, says.

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