This simple example shows how much the VAT hike could knock off your retirement
Financial services group Old Mutual recently published an updated assessment on how South Africa’s new taxes will impact your personal finances.
While the report primarily focused on the changes that you can expect to see from 1 April 2018, it also cautioned of the long-term affects of taxes, such as the new 15% VAT rate’s affect on your retirement plans.
“Whilst the impact on consumers may be more significant, the financial planning impact is relatively low,” it said.
It provided the following example, which sets out the impact of the increase in investment charges and the increase in expenses in retirement due to the VAT increase.
The example assumes that clients will not reduce their savings towards retirement.
Example
Current:
- Mr J, 45 years old and retiring at 65.
- Retirement annuity R3,000,000 (contributing R10,000 per month)
- Linked investment R500,000 (contributing R1,500 per month)
- Current expenses: R35,000 per month
- Retirement expenses: R40,000 per month
Changes based on VAT increase:
- If we assume that the client’s expenses of R35,000 now, includes VAT at 14%, then the increase to 15% results in a R300 increase.
- If we assume that the client’s post retirement expenses of R40,000 (including VAT at 14%) increases to account for the additional 1% in VAT, the increase in his expenses is R350.
- The impact on the client is that their financial plan runs out 1 year earlier.
Increase in Prudential limits
While there will be a notable increase in your expenses which may require an adjustment of your retirement plans Old Mutual also notes that other changes, such as an increase in prudential limits, means that the budget is likely to be a net positive for retirement in South Africa.
“The Budget deals with reforms in financial services, this includes a specific proposal to increase prudential limits with the aim of managing capital flows and encouraging investment,” it said.
“The proposal is to increase the offshore limit for institutional investors by 5% across all categories.
“Effectively, this means that clients will benefit from increased offshore allocation, depending on the specific investment vehicle and investment funds. For example, retirement funds will be able to invest 30% offshore (previously 25%) as well as 10% in Africa (previously 5%).
“The increase will allow investors to further diversify their investments outside of South Africa. Financial planners need to ensure that clients have the right asset allocation exposure to meet their personal investment targets.
“Investment management teams will then incorporate the changes into their investment planning process and make the necessary asset allocation enhancements where they deem appropriate in portfolios,” it said.
Read: How much income tax you’ll be paying based on your monthly salary from April
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