Tax plays a major part in retirement planning, giving you opportunities to improve your income in retirement, Jenny Gordon, a senior legal analyst at Old Mutual, told the Old Mutual/Personal Finance Retire Right seminars.
But, she warns, changes to the tax regime can have a positive or a negative effect on your retirement plans. Every time there are changes in taxation, ask yourself three questions:
- How does it affect my plans for retirement;
- Will it affect my investments; and
- Will it affect my capital and income at retirement?
Dealing with the latest Budget, Gordon says there were consequences in both the build-up and retirement stages, as well as on estate planning.
The changes include:
- Far-reaching tax cuts. The tax cuts gave taxpayers earning up to R150 000 a year a 25 percent cut in taxes; those earning between R150 000 and R300 000 a year an average reduction of 14 percent; and those earning more than R300 000 a year a tax reduction of about seven percent.
The tax cuts, if channelled into retirement savings, will have a significant impact on the amount of capital available at retirement.
- Interest income exempt from tax went up from R4 000 to R6 000 a year for people under 65 and from R6 000 to R10 000 a year for people 65 and older. But you may only claim an exemption of R1 000 on interest and dividends you receive from foreign sources.
- Annual donations tax exemption up to R30 000 from R25 000.
- The tax threshold on which you do not pay tax on annual income increased from R27 000 to R42 640 for people 65 and over. Gordon says that if the upward trend in the threshold continues, this will have a positive impact on the taxation of people of 65 and older in future.
Currently, combined with the R10 000 interest exemption and tax-deductible medical aid contribution, the new threshold provides people of 65 and older with a potential tax-free income of R68 640 a year.
- Tax relief for small businesses.
- Estate duty rebate of up to R1.5 million.
- Deductions and fringe benefits for employees tightened up.
- A deemed provision on offshore earnings. If you do not declare what you have earned on your R750 000 foreign investment allowance, a taxable income will be presumed.
- Tax on trusts was raised to a single rate of 40 percent.
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