As the need for retirement planning has increased considerably in recent times, the fiscal environment in which this takes place has become increasingly hostile.
Much has been written about the increases in taxation on retirement funds, but what has not been appreciated is the long-term damage it will do to investment returns.
In 1996 the government introduced a 17 percent tax on interest income and net property income. In 1998 this was increased to 25 percent. It has been estimated that this increased tax load will, over time, reduce the average return of retirement funds by more than one percent a year.
Over say a 30-year period this could lead to a drastic reduction in end benefits to a retirement fund member.
Politically this is a clever tax. It rakes in billions of rands every year, with the retirement fund industry having to act as an efficient tax collector. As few people fully understand this tax, there is no outcry, no marches and no protests.
The tax is not deducted at the end of the month, and you don't have to fill it in your annual income tax return. To all intents and purposes the tax does not exist.
But exist it does and it most certainly is going to have an effect on your final retirement benefits.
It is having an effect on the retirement fund industry. Property as an institutional investment has been downgraded and pension funds are trying to reduce their exposure to property.
A second effect will be to increase the move from defined benefit funds (where the final benefits were guaranteed when you joined a company) to defined contribution funds.
The reason for this is that under defined benefit funds the ultimate guarantor of benefits is the company pension fund.
If these new taxes are to be permanent, it will reduce the overall returns of funds and increase the ultimate liability of the pension funds to members.
The solution? Move them across to the defined contribution fund where the investment risk lies with the member.
Apart from these hostile moves against the retirement fund industry there have been other trends that are having a detrimental impact on retirement planning.
Take for example the maximum tax-free portion of R120 000 a member can take on withdrawal from a retirement fund. This amount has not changed for over 14 years and has not been adjusted to take into account inflation over the same period. Had this allowance kept pace with inflation, it should have been R450 000 by now.
So by doing nothing, the fiscal authorities have actually increased the tax taken from retirement funds.
The same applies to deferred compensation schemes, once a popular way of getting extra tax-free benefits on retirement. Briefly it works like this: Instead of taking an increase in salary, the employee effects a deferred compensation scheme via the employer. The policy is taken out in the name of the company who cedes it to the member on retirement.
The first R30 000 of the total pay-out is tax-free. This tax-free benefit too has been left unchanged for more than 11 years. Had it simply kept pace with inflation, the tax-free portion should have been in excess of R120 000 by now.
No one is sure what the recommendations in Michael Katz's final report on South Africa's tax system will be, but what is likely is that the tax net on retirement funds will increase even more.