Finance minister Enoch Godongwana announced in his 2023 budget speech that the tax-free bracket for retirement fund lump sum benefits would increase for the first time in years.
The periodic review of monetary values in tax tables also included inflation-related adjustments to personal income tax tables and brackets for transfer duties.
“The most significant benefit, however, is for retirees,” said Denver Keswell, senior legal advisor at Nedgroup Investments. “The tax-free portion for retirees has increased from R500,000 to R550,000, which is the first increase to the tax-free portion in many years.”
Keswell said while some may want to see larger increases, “any relief is better than nothing and could go a long way to helping many people”.
Retirement fund lump sum withdrawal benefits were also adjusted in accordance with inflation, thereby upwards by 10%.
Tiaan Herselman, head of advice at Old Mutual Wealth, said investors should pay attention to the retirement fund adjustments, as they may be able to make use of the tax benefits associated with retirement funds and tax-free savings.
He said that retirement annuities or retirement funds are good savings vehicles to reduce income tax liability for the year.
This is because a contribution to a retirement fund is deductible for up to 27.5% of annual taxable income or R350,000 – whichever is lower.
“In simple terms, if your income is R50,000 per month, your income tax liability would usually be in the region of R11,300 based on the latest income tax tables,” he said.
“But if you contributed R5,000 per month to a retirement annuity your income tax would reduce to R9,500, which equates to a saving of approximately R1,800.”
Considering the tax benefits associated with them, “it is worthwhile considering additional contributions to retirement funds and then saving the tax refund received from SARS into liquid investments such as the tax-free investment or discretionary investments such as a unit trust”.
Not all good news
Head of strategic finance at Momentum Metropolitan Rowan Burger found the budget “disappointing from a retirement reform perspective”.
“We didn’t get the detail we need to ensure that we can land the two-pot system efficiently come 1 March 2024,” he said. “As a result, I expect many stakeholders to argue for an extension to 1 March 2025.”
The two-pot retirement system refers to a proposed retirement reform which would allow someone with a retirement fund to access a portion of their savings for emergencies while saving the remainder.
“Permissible withdrawals from funds accrued before 1 March 2024 will be taxed according to the lump sum tables. Withdrawals from the ‘savings pot’ before retirement will be taxed at marginal rates. On retirement, any remaining amounts in the savings pot will be taxed according to the retirement lump sum table,” stated the budget.
Many stakeholders expected the budget to provide more clarity on this system and announce the release of draft legislation.
However, the budget only referenced “forthcoming draft legislation”, which it claimed would clarify concerns.