Reforms in the retirement Industry that we can expect to see in place by early 2012 are again in line with the governments plans to make as many lower income earners self sufficient in retirement as possible. The reforms announced by Finance Minister Gordhan offer lower income earners a greater incentive to save and have made it less effective for higher income earners that earn around R900K.
For higher income earners the maximum tax deduction for retirement savings has been capped at R200K from both you and your employer. The main reason for this is of course to limit higher income earners from using Retirement Annuity contributions to lower their taxable income. The other important aspect to consider is that the differentiation between pensionable and taxable income falls away and all calculations are based on taxable income.
In short the maximum you are allowed as a tax deduction is 22.5% of your taxable income and if you are earning less that R900K then your total contribution to retirement funding cannot exceed R200K to qualify for a tax deduction. This is quite a significant advantage where for example someone earning R400K is allowed to increase the contribution from R90K to anywhere up to R200K and qualify for a tax deduction. This would significantly reduce your tax and ensure that you are well catered for during your retirement years.
Employer contributions are now seen as a taxable fringe benefit and attract Fringe benefit tax which would increase your taxable income.
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Social security will become a reality in South Africa at some time in the near future along with a National Health scheme which will need to be paid for with Tax Payers money. It is really important to take advantage of every possible tax deductible item which are offered as retirement savings incentives, this is in line with the Governments promotion of retirement self funding by individuals to reduce the burden on the Social Security scheme when launched.