Finance Minister Trevor Manuel's budget was very well thought out. He managed to put R3bn back into our pockets (particularly those who earn less than R60 000 a year) without making us feel we were being robbed somewhere else.
How? By taking more from the fuel levy while oil prices have been falling; by increasing the sin taxes you pay for your vices; and by funding the new Umsobomvu Trust, intended to help the unemployed, with a levy on demutualising life assurance companies. This tax doesn't hurt anyone's pocket because although Sanlam and Old Mutual intend giving their reserves away, policyholders don't know what their "windfall" will be, so they have can't miss what they never had.
The increased tax on retirement funds also doesn't seem to affect any of us or does it? Not right now, but let's look at this a bit more carefully.
Pension funds, provident funds and retirement annuity funds fall into two categories: defined contribution (where the contributions are fixed and the fund managers' success in investing the funds determines what you get when you retire) and defined benefit funds (where the proceeds you receive on retirement are fixed, but contributions are adjusted to ensure the payout). Most funds these days are defined contribution funds.
Before 1996 retirement funds were not taxed. When first introduced, the tax on retirement funds (which applies to interest and net rental income received by the funds) was set at 17 percent. In this year's budget, it was announced that the tax would increase to 25 percent.
What does this mean for a member of a defined contribution fund? When there was no tax, if for example R100 was invested and assuming the fund managers achieved income of 15 percent a year, the R100 would be worth R115 the next year. The income would be reinvested and the following year it would be worth R132,25. After five years, the R100 would have doubled to R201,14, and after ten years it would be R404,56. The longer it is before you retire the higher your "investment" in the fund would be and the more money you would have to retire on.
However, with a tax of 25 percent on the fund's income, the R100 investment looks very different. Let's assume, for simplicity's sake, that the fund invests only in rental earning property and interest-bearing investments (which in terms of the law amount to less than 50 percent of the total). In the second year, your R100 investment would only be worth R111,25, in year five, it would be R170,41 and in year 10, R290,40.
There's a big difference between what the non-taxed fund and the taxed fund makes available for your retirement. And the differences get bigger the longer you contribute.
The effect on defined benefit fund members will be that you will need to contribute more to ensure that your retirement proceeds are the same.
Obviously, the retirement fund managers will try to invest in such a way that the impact of the tax is reduced. For example, dividends from shares are tax free, so they may buy more shares and less interest-bearing investments and rental-bearing properties. The tax could, therefore, impact on the property market
Even if the fund managers do this, the South African Institute of Retirement Funds estimates the amount available in the fund for your retirement after working for 40 years, will be 27 percent less than if the tax had not been imposed.
If your marginal tax rate is higher than 25 percent, you may think that it is still better to invest in a retirement fund rather than in any other investment, where the interest will be taxed at your marginal rate rather than 25 percent. But 53 percent of registered taxpayers pay tax at a marginal rate less than 25 percent. Most of these people are wage or salary earners who have very little choice as to whether they belong to the retirement fund. And it is these people who will look to the government when they retire if the income they get from their retirement fund is too little to live on.
So, although more money has gone into the pockets of the poor this year, the sacrifice may be what will go into their pockets in the future.