Personal Finance Editor, Bruce Cameron and columnist, Magnus Heystek, who is deputy chairman of the Citadel financial services group were the main speakers at a Syfrets Private Bank/Saturday Argus Investors Club meeting. Heystek and Cameron, who are the joint authors of Retirement - The Amazing and Scary Truth, spoke about the enormous complexity of retirement for everyone. This is an extract from Cameron's speech.
The main principles of the Michael Katz recommendations on the taxation of retirement
funds are based on all funds being taxed in the same way and that retirement funding
should not be given any tax advantages over any other type of savings.
Bruce Cameron says the main argument used by Katz to justify his recommendations was
that people are using one type of investment as opposed to another to gain a tax
advantage, otherwise known as tax arbitrage.
KATZ ON PRE-RETIREMENT
Deferred tax on retirement fund contributions
If you are employed:
* Contributions up to 7,5 percent of your pensionable income are tax deductible;
* Employers are entitled to claim an amount equal to a maximum of 15 percent of an
employee's pensionable income.
If you are self-employed:
* Contributions of up to 22,5 percent of your taxable income are tax deductible
Tax on the build up of retirement funds.
Katz recommended that interest, rental and any trading income earned by the capital in
a retirement fund should be taxed at a flat rate of up to 30 percent.
In the 1996/97 budget the government accepted the principle but at a lower 17 percent.
This was pushed up to 25 percent in the 1998/99 budget making a real impact on the
final benefits. This tax does not apply after retirement.
KATZ ON RETIREMENT
He has recommended that all your retirement benefits should be lumped together and the
full amount taxed.
He says that tax incentives should be given to encourage you to buy a monthly pension
(annuity) with some of your accumulated retirement funds.
The incentives Katz recommended are:
All retirement benefits should be treated as a lump sum and the first R50 000 should be
tax free.
Of the lump sum used to purchase a monthly pension:
* First R120 000 tax free; and
* A further 50 percent should be tax free up to a maximum of R210 000.
A lump sum of R540 000 provides the maximum tax free amount of R380 000).
The remainder of the lump sum is taxed on a sliding scale with marginal rates moving up
to a maximum of 45 percent, which is reached at R750 000 after the deduction of the R380
000 tax-free amount.
EXAMPLE OF THE KATZ EFFECT
Capital Sum:
R1 500 000
Tax Free:
R380 000
Taxable Amount:
R1 120 000
Tax on the first
R750 000:
R202 500
Balance at 45
percent:
R166 500
Tax payable:
R369 000
Funds available for
investment:
R591 000
Plus annuity:
R540 000
Total:
R1 131 000
An investment of R540 000, giving you the maximum R380 000 tax benefit, would buy you a
monthly pension of about R5 300 if you are a man aged 60. Women would get less because
they live longer.
HOW KATZ TAKES MORE OUT OF YOUR RETIREMENT POCKET
For simplicity's sake say you had R1,5 million in retirement capital on the day you
retired.
On the Katz recommendations in the above example you would pay tax of R369 000.
Currently on a defined contribution pension fund you would pay:
Capital Sum:
R1 500 000
Less two thirds
compulsory pension:
R1 million
Lump sum
R500 000
Less tax free
portion
R120 000
Taxable portion
R380 000
Tax payable at
average
rate of 25 percent
R95 000
So the difference between now and Katz tax system would be:
Tax payable under
Katz:
R369 000
Under the current
system
R95 000
Extra tax under Katz
R274 000
This is an additional 18,2 percent of your retirement capital that you will lose under
the Katz recommendations.
KATZ AFTER RETIREMENT
Katz made no recommendations. You would pay tax as you do now.