In the run up to the general election in 1994 the issue of pension funds in the "new" South Africa was discussed at length by many people.
Together with the scary stories about the confiscation of "white" homes and assets, it was suggested that the new government would eye the vast amounts of money that had accumulated in the various pension funds in South Africa. The combined assets of the retirement fund industry in South Africa, at last count, exceeded R500 billion. A large amount of captive money, it was said, that would be raided by an avaricious government looking for more revenue.
It looks as if the pension fund horror stories may come true. For the second time in three years the government has drastically increased the taxation on retirement funds.
In the 1996 budget a tax of 17 percent on the interest income and property rental of retirement funds was introduced, a move which it was said then would garner more than R5 billion a year. The latest increase from 17 to 25 percent will, at current levels, rake in another R1,2 billion, which pushes revenue from this helpless source to more than R7 billion a year.
Although these increases were recommended by the Katz Commission, it was on the basis of increased deductions for contributions. It seems as if the government has cherry-picked the recommendation it liked more revenue and ignored the one it didn't.
I'll put money on it that within two years the tax rate will increase to 30 percent or more.
This big jump in taxation is going to have a number of consequences. The first one is a reduced rate of return on the funds over time. Two years ago it was calculated that the increase in tax would reduce long-term returns by about 0,8 per cent a year. The latest increase will reduce this further, perhaps by another 0,2 percent. Over time that makes for a dramatic reduction in benefits paid out to retiring members.
In a deflationary environment this has an even bigger impact. A reduction of say one percent a year on a fund growing at 20 percent (with inflation at 15 percent) is much less than a reduction of one percent on a fund growing at 10 percent a year with inflation at five percent.
Secondly, the increase in taxation on property rentals will further pressurise the retirement industry to reduce its exposure to property in favour of equities, both local and offshore. This could further weaken the local property market.
In four years this government has provided no relief for retirement funding. In fact it has drastically increased the revenue take from retirement funds and retiring members and at the same time it has closed many loopholes that investment planners used to legally reduce tax on money from pension and provident funds.