Long term effects of the Budget Speech

Now that you know how your day-to-day finances will be affected by the Budget Speech, here's how you can prepare for long term effects.

How will the 2013 budget affect us over the longer term?
The Budget is not all about tax. On the long-term side of the Budget we can look more at the benefits we, as citizens, receive from the Government.

Encouraging household savings
South Africans have poor savings habits. We consume all our money and do not save enough for tomorrow. Not only do South Africans need to save more to provide for their own futures and their families, but the economy also requires South Africans to save.

With the high debt levels and low savings levels we, as a nation, are actually consuming today what we have not yet earned tomorrow.

In last year’s Budget Speech the Minister indicated that there would be focus on incentives to help South Africans save. These products will be introduced from April 2015. As an investor in one of these products you will not pay tax on the income you earn in the product - whether it is interest, capital gains or dividends; and you will not be taxed when you withdraw from the product.

According to the current proposal you will be allowed to save up to R30 000 per year (with a lifetime limit of R500 000) into these products and not pay any tax on the return you earn, thereby enabling many South Africans to make their savings work harder for them.

Retirement reform
The comments made about retirement reform will not affect us in the immediate future, but it is important that we understand this, since after its implementation (which, according to the latest draft proposals that were published for public comment at the same time as the Budget speech, will only become effective on or after 2015), it will affect most of our lives while saving up for retirement as well as the retirement income that we will eventually receive.

Very few South Africans are able to retire with sufficient retirement income. There are many reasons for this, including insufficient contributions and withdrawing your retirement savings before retirement.  In the 2011 Sanlam Benchmark Survey 20% of people indicated that they withdraw their retirement savings when they left an employer. The concerning aspects is that 72% of people used it to settle debt and 29% used it to provide for living expenses.

One of the changes the Minister mentioned is simplifying and harmonising the retirement systems. For consumers part of this simplification would mean that we will no longer have to understand all the complexities and differences between the pension, provident and retirement annuity funds.

As indicated in last year’s Budget the proposal is that you will be allowed to deduct up to 27,5% of your income if you contribute this towards your retirement irrespective of the type of retirement fund into which you invest or whether the contributions are made by you or your employer. These deductions will however be limited to a maximum of R350 000 per year.

This means that if you earn more than R1, 27 million you will not be able to get immediate tax relief if you deduct a full 27, 5% contribution, but this will be rolled-over and allowed against your lump sum or later annuity income.

There are further proposals around retirement reform to enable individuals to make provision for adequate income in retirement. However these proposals still need to be finalised. One of the major aspects raised in the Budget Speech about retirement reform is the preservation issue, but any changes in this regard will be widely consulted prior to finalisation and any changes will be phased in and will take into account that people have already saved for their retirement income in a specific manner.

Trusts
National Treasury previously already signalled an intention to start looking at the taxation of trusts. It is acknowledged that there is a legitimate use for trusts to provide for minor children and people with disabilities, but various proposals are being considered to prevent trusts from being utilised to avoid tax.

Disability and income protection
You can provide for yourself in the event of disability by either obtaining insurance for replacing your income or providing for a lump sum. Currently different disability and income protection products are treated differently for tax purposes. It is proposed that all non-retirement fund disability and income protection policies will be treated the same, i.e. contributions will not be tax deductible and the pay-outs will not be taxed.