Retirement fund top-ups don`t leave you much better off than investing directly on the JSE.

Published Feb 18, 1998

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Contributions to retirement funds to help bring down your tax for 1998 tax year have to be made before February 28.

Since promoters of retirement funding through pension and provident funds and

retirement annuity funds claim that their tax advantages make them superior to an

investment in unit trusts or into shares directly, Alister MacKenzie, a tax partner at

KPMG, offers in the firm's latest Tax Letter a comparison of the tax effects of putting

money into provident funds or shares.

The results of the comparison show that the tax deferral on fund contributions and fund

income does not provide the benefit that many people claim. It shows that, under the

current tax system, whether you invest directly in shares or in shares through a

retirement fund, the tax effects are similar.

If the proposals in the Third Interim Report of the Katz Commission were adopted, taxes

payable would not be any different, assuming the first tax-free amount of R50 000 had

already been used elsewhere and no annuity was bought - which is normally the case with a

provident fund. The Katz Commission has also proposed a flat tax rate be applied to

interest, rental and other trading income, and this rate is currently 17 percent.

But according to MacKenzie, the effect on the comparison of retirement fund and direct

equity investments of this tax is slight as the interest element is very small. In

reality, though, as provident funds invest in property producing rental income, the tax

would be greater.

COMPARISON

OF INVESTMENTS

The following table shows the results of the

comparison of the two types of investment.

PROVIDENT FUND

DIRECT INVESTMENT

Contributions/

investments

R931 541

R512 349

Income

- dividends

472 831

253 479

- interest on cash

7 644

5 043

Tax on interest

-

(2 269)

Administration/

management costs

(51 509)

(31 059)

Appreciation in value of shares

1 979 208

1 060 826

Total

3 339 715

1 798 369

Tax at 45 percent

1 502 872

-

Total

1 836 843

1 798 369

Shortfall

38 474

The comparison, in the table above, assumes, conservatively, that the Johannesburg

Stock Exchange (JSE) has grown by 20 percent a year over the past 15 years and that both

the provident fund and the direct investment are invested in the JSE. Contributions

started at R2 000 a month and grew at 12,5 percent a year. For the provident fund

contribution this amount is pre-tax but for the direct investment tax is deductible at 45

percent so the after-tax contribution is R1 100 a month.

On the direct investment, funds are converted to equities every three months and earn

interest at 12,5 percent. Investment in the provident fund is assumed to take place in

equities every month because of the larger pool of funds available, and there is no

investment in "prescribed" securities. Costs on the provident fund are at 0,4

percent a year and for direct investment at 0,45 percent a year.

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