[SPONSORED] Budget to address reliance on state
The 2018 National Budget will need to explicitly outline how the state plans to strengthen the fiscus and encourage significant economic growth.
This week the South African Finance Minister will outline the government’s top-level financial plan to tackle the country’s growing fiscal deficit. To avoid a further credit rating downgrade, and keep the momentum created by a renewed sense of business confidence, the 2018 National Budget will need to explicitly outline how the state plans to strengthen the fiscus and encourage significant economic growth.
This is according to Malusi Ndlovu, Head of Old Mutual Corporate Consultants at Old Mutual Corporate, who says that the Budget Speech is likely to focus on fiscal consolidation and growth stimulation. He believes that one way the Finance Minister can do this is by reaffirming the government’s commitment to retirement reforms. “Without a clear view of how National Treasury plans to fully implement retirement reforms, a lack of adequate retirement provision by working South Africans will continue to be a drain on the National Budget, due to their dependence on the state old age pension.”
He will be looking to the Finance Minister to provide clarity on the annuitisation of provident funds as well as the issue of auto-enrolment.
Currently, as a result of the partial implementation of the so called T-Day reforms (Taxation Laws Amendment Act, 2015 implemented 1 March 2016), retirement proceeds from provident funds are not required to be annuitised (i.e. used to buy a pension), creating a risk to the fiscus.
“Annuitisation in this context is the process of converting your retirement fund investment into a series of periodic income payments at retirement. The policy in its current form maintains the likelihood of provident fund members becoming dependent on the state. Retiring provident fund members often opt to settle debt, or spoil themselves rather than reinvest the lump sum to see them through their retirement years. This behaviour comes at a cost to the National Budget," says Ndlovu.
In the pre-retirement phase, members of provident funds are benefiting from the tax deductibility of retirement contributions up to 27.5%, without restrictions on cashing out at retirement. This favourable deduction regime was afforded to all retirement fund members as part of the T-Day reforms with the ‘quid pro quo’ being annuitisation at retirement. Therefore, allowing the full tax deductibility of contributions without compulsory annuitisation unnecessarily reduces the personal income taxes collectable by the state.
The second issue Ndlovu seeks clarity on is the implementation of auto-enrolment for all employees. “Currently, half of South Africans who are employed in the private sector are not using formal investment vehicles to save towards their retirement. Auto-enrolment would encourage or require employers to automatically enrol their workers into a retirement fund, which could be sponsored by the employer or sourced from a third party. This law is envisaged to aggressively address the issue of the country’s low savings rate and relieve the retirement underfunding burden on the state.”
The positive and well received State of the Nation Address now needs to find concrete expression in the Budget Speech. By addressing certain retirement-related aspects, the Minister could reduce the strain on the fiscus, increase the savings rate as well as create confidence through clarity.
Finally, the possibility of tax increases in the 2018 financial year makes retirement funds even more attractive as a way to reduce one’s aggregate tax rate. By contributing more, up to the deductibility limits, individuals can reduce their personal income tax. In addition, returns earned inside the retirement funds are tax-free. Regardless of any budget announcements, this is unlikely to change.