A cap that must be lifted once a year

There are gripes from rich taxpayers concerning the “capping” of tax-deductible contributions to retirement funds scheduled for implementation in the 2014-15 year of assessment.

The new rules for tax-deductible contributions to retirement funds provide for an increased overall contribution level of 27.5% of taxable income.

However, tax-deductible contributions may not exceed R350,000 a year. Thus taxpayers with taxable income exceeding R1.27m a year (about 60,000 South African taxpayers) are potentially vulnerable.

But will a contribution of R350,000 a year buy a pension annuity sufficient to maintain the lifestyle of a high-net-worth taxpayer? Take a monthly contribution of R31,250 over 25 years, growing at 5% a year, return rates of 10% and inflation at 7%. Answer: R10.8m in today’s money.

Today, the general rule of thumb is that a retirement fund withdrawal should not exceed R6000 a month per R1m of retirement capital. So the above contributions would yield a taxable annuity of about R60000 a month or R720000 a year — not enough to pay for the two homes, an ex-spouse (or two) and four grandchildren in private schools acquired during a working life.

Initially it was proposed that there would be two contribution limits, one for taxpayers under 45 (R250,000) and a higher cap for those over 45 (R350,000). Perhaps this could be revisited, particularly for taxpayers older than 50. The counter-argument would be that this would constitute the inconsistent treatment of taxpayers.

Of critical importance is that the cap of R350,000 is revised upwards every year to take account of inflation and not left to stagnate, as is the case with the second schedule tax rates on lump sums that have hardly been revised since 2007.

There may be changes to the details of the amendments before the income tax amendment act is promulgated towards the end of the year. But it would be surprising if the general principles change.

Originally published in the Sunday Times: Money & Careers Tax Talk column.

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