What Will T-Day Bring?
T-Day – the day tax reforms for retirement funds of all kinds will be launched – is set to take place on 1 March, 2016.
The major aim of the new tax regime is to focus the financial activities of South Africans on savings and investment for retirement – by means of tax-free savings accounts (TFSAs), capital accumulation and income tax deductions.
With a savings rate at 15.4% of its GDP, South Africans are among the worst savers in the world. As follows, T-Day reforms will concentrate chiefly on fostering a countrywide culture of saving.
Heavy dependency on the state and elderly poverty are among the most arduous challenges facing our country at present.
Increased income tax deductions – for pension, provident and retirement funds – is the next step, after TFSAs, towards addressing our national savings crisis.
The New Tax Regime
Come T-Day, taxpayers will be able to deduct more in contributions from their taxable income.
After T-Day, you will be able to deduct contributions (yours and your employer’s) – of up to 27.5% of your taxable income or salary/remuneration – or the higher thereof.
Contribution deductions will be capped at R350 000 per tax year to prevent excessive deductions.
Although your employer’s contributions and group life assurance premiums will be added as fringe benefits, you will be able to deduct them from your taxable income, as part of the 27.5%.
There will however be special formulas for calculating employer contributions to hybrid retirement and defined-benefit funds.
Contributions that exceed the yearly cap can be rolled over to successive years, should R350 000 not be reached. Also, at retirement, you can add what is unclaimed to your tax-free lump sum.
From T-Day, the same pension fund annuitiastion rules will apply for new contributions to provident funds. That is, at retirement, at least two thirds of savings are to be used to buy a pension.
Tax Free Savings Accounts
T-Day will allow South Africans to take full advantage of new savings options, offering generous income tax concessions and ready access to their savings (TFSAs).
TFSAs can be used to top up your retirement savings. And you are free to withdraw all of your money at any time, without restrictions or penalties. Just remember, this will mean sacrificing on compounding growth.
With TFSAs, you can save up to R30 000 yearly and R500 000 overall – without having to pay a cent of tax on your savings – not even on growth (interest, dividends or capital gains) or withdrawals.
That said, TFSAs alone will not suffice. Don’t neglect to set up a pension fund to complement your savings. T-Day or not, it makes financial sense to capitalise on a retirement fund, while also boosting your savings and accumulating capital through TFSAs.