During 2020 the world watched in horror as COVID swept through most countries, placing a large burden on the healthcare system and workers, and ultimately ending in massive human tragedy. Millions of people’s livelihoods have been decimated by lockdown restrictions around the world, the long-term implications of which will play out for a long time to come.
I didn’t know many people who had personally been infected by the virus during the first wave, unfortunately with this deadly second wave, which we can hopefully put behind us soon, it was a different story. I battled to find any families not affected. I tested positive in mid-December, and was still isolating over Christmas, which was tough on our small boys. This virus is no joke, it takes a proper toll on one’s body and it is quite a journey to recovery. I still need to watch my heartrate and my sense of taste and smell is not yet back to normal, and I had a mild case! I required strong meds, monitoring oxygen levels and a long period of bed rest but luckily not hospitalisation. Our thoughts and condolences go out to all our clients, their families and friends who have battled this virus and lost loved ones.
I remember writing our newsletter this time last year… the end of 2019 had been dismal, so the new year HAD to be better. I even named it ‘Welcome to 20-Plenty!’ Well, little did we know what the year had in store for us. Personally, we welcomed the birth of our third son Jack as we were entering the first lockdown at the end of March 2020. Mixed emotions, empty hospitals, rules changing every day, home schooling, it was quite a ride. At our investment committee meeting last February, we had decided to sell SA equities and invest more in the S&P 500 (US Stock Market). What a trade that turned out to be, helped by the Rand blowout in subsequent months. But markets respond and recover quickly, with 2020 providing us with many other opportunities to bank great returns for our clients. As the saying goes ‘never waste a good crisis!’
If 2020 wasn’t enough of a roller-coaster ride for you, hang onto your seats for many changes in South Africa’s Retirement Industry regulations come 1 March 2021.
A summary of the key changes is as follows:
- The T-Day reforms were supposed to be implemented 1 March 2015, however there was strong pushback regarding the forced annuitisation of Provident Funds (currently you can withdraw 100%) but this seems to be going ahead now.
- Going forwards, members of all retirement funds (Pension/Provident/RA) will have to comply with the same rules which only allow accessing a maximum of one third in cash at retirement. This is unless the member’s total retirement interest does not exceed R247 500, in which case the member can withdraw 100%.
- Grandfathering provisions ensure the restriction only applies to funds contributed on or after 1 March 2021. Members with Provident or Provident Preservation Funds aged 55 or older on 1 March 2021, will still be able to access their full benefit, including any contributions made afterwards.
- In terms of the Taxation Laws Amendment Bill, also effective 1 March 2021, members will only be allowed to withdraw their RA’s and Preservation Funds if they can prove they have been non-resident for tax purposes for an uninterrupted period of 3 years. This is a change from the current status quo where members have immediate access to their funds when they emigrate, provided the emigration is recognised by the Reserve Bank.
Regulation 28 guidelines which govern how we are able to invest within retirement funds, have also made it into the press recently, under ‘Prescribed Assets.’ Latest consultations are steering towards a possible inclusion of 5% for infrastructure projects, however at this stage, it will be an allowance not a forced investment. We will share any further updates with our clients.
We would like to remind you that the end of the 2021 tax year is fast approaching, and with it the deadline to make use of your annual tax incentives SARS offers to encourage South Africans to save.
Here are some key points to remember about Tax-Free Savings Accounts and Retirement Annuities:
Tax-Free Savings Accounts (TFSA):
- No income tax, dividend withholding tax or capital gains tax is applicable.
- Annual contribution limit of R36 000 (R3 000 per month for debit order investors). You will pay a penalty of 40% on the amount you invest above the maximum.
- Current lifetime contribution limit of R500 000.
- Only a natural person with a valid South African Identity Document/Birth Certificate may invest.
- Having more than 1 TFSA is allowed, but limits apply across all investments.
- Amounts withdrawn do not create additional contribution capacity.
- Any contributions paid by a parent on behalf of children/minors will be viewed as a donation (R100 000 annual donations tax exemption applies).
- You can transfer between platforms.
Retirement Annuity Contributions (RA):
- 27.5% of your gross remuneration/taxable income (whichever is higher) is tax deductible.
- Your annual contribution is capped at R350 000.
- The above applies to all retirement fund contributions, pension funds, provident funds, and retirement annuity funds.
According to Section 10c of the Income Tax Act, whatever amount you contribute towards your retirement funds that did not rank for a deduction (i.e. that is greater than the R350 000 each year) may be offset against any income earned when you eventually start to draw an income from your living annuity in retirement, and/or any lump sum you elect to take at retirement. Hence, you can invest more than the annual cap and allow that portion to grow tax free.
A Retirement Annuity provides a tax-efficient vehicle that can maximise the value available at retirement to convert into a living annuity. It also provides considerable estate planning benefits as any lump sums or annuities received by dependents on death are exempt from estate duty, capital gains tax and executor fees. However, any remaining previous contributions which did not rank for deduction, made after
1 March 2015 will be dutiable in the investor’s estate.
As at the end of December 2020, our Harbour clients have enjoyed steady returns within their retirement funds of 10% last year, and 8.5% p.a. over the last 5 years (Harbour Advisory Reg 28 Index Balanced). This however has not been the case, especially across many of the large Balanced Funds in the industry. Taking into account all the tax and estate duty benefits that a Retirement Annuity offers – together with these solid returns – it really is tough to beat!
Just a reminder that once you convert your Retirement Annuity into a Living Annuity, although you don’t have to adhere to the Regulation 28 investment guidelines, your contract is with a South African Insurer, and hence your money stays in SA. Should you need to expatriate the proceeds, this could be costly and highly admin intensive.
We understand that retirement planning is confusing and complex, and unfortunately once a decision has been made, and implemented, it cannot be undone.
Please feel free to contact any of the Harbour Wealth Financial Advisers should you want to take advantage of these tax efficiencies or have the various retirement planning scenarios explained in more detail.