Aimed at encouraging taxpayers to save more towards their retirement, the South African National Treasury announced plans in February to introduce a flat 27.5% contribution limit on the amount a taxpayer can place within a tax-relieved pension fund (as a percentage of salary), an increase on the existing limits.
This new limit will be introduced across the three main types of retirement vehicle – pension funds, provident funds and retirement annuities.
In addition, the National Treasury plans to introduce a R350,000 (£22,000) cap on annual contributions – the first time such a cap has been proposed and, for comparison, significantly less than the £50,000 cap currently permitted in the UK.
A consultation on the proposals closed at the end of May but, if the changes are accepted, the National Treasury said it plans to implement them “on or after” 2015.
David Gluckman, head of employee benefits, future positioning and research at South Africa-headquartered Sanlam, said the proposed new limits on pension contributions are “substantially above the current level, which must mean there will be some opportunities for companies such as Sanlam”.
Meanwhile, Craig Aitchison, general manager of corporate customer solutions, Old Mutual Life Assurance Company, added “the onus will be on the insurance companies to come up with strategies to encourage people to put more into their retirement savings to reduce their retirement savings shortfall”.
However, it is at the HNW end of the client spectrum where the imposition of the R350,000 cap has the potential to open more advice and product development opportunities.
Gluckman points out that, while the political reasons for introducing a cap are understandable, the reality is that it will cause problems for those who reach it.
Matthew Nell, director at the Praxis Group, said: “By imposing a ceiling on the tax deductibility of contributions, those earning more than R100,000 a month could face higher effective rates of income tax.
“Furthermore, they are not incentivised to save more than the R350,000 pa ceiling in local retirement schemes. This could present an opportunity for overseas-based pension schemes.
“Historically, these schemes were not attractive to HNW South African residents as contributions were not deductible for tax purposes.
“If the proposals are enacted as they stand, and assuming that the client has already exhausted their R350,000 deduction into local schemes, local and foreign schemes will be competing on a more level playing field as contributions to either would be made out of already taxed income.”
One Cape Town-based independent wealth manager, Paul Nicholson of St James Global, said one option for clients will be to use a Guernsey-based Retirement Annuity Trust, something he said is already proving popular.
