Commentators are at odds over whether retirement reforms will take centre stage in this year's 2015 Budget Speech. Head of growth market solutions at Sanlam Personal Finance Karin Muller feels that the Finance Minister will make mention of retirement reforms, while Michelle du Toit, principal consultant at Old Mutual Corporate expects delays in retirement reform announcements.
Du Toit pointed out that some of the Retirement Fund Reforms that had been planned for 2015 have been delayed and will most likely be implemented in 2016, and possibly only in 2017.
She stressed that more needs to be done to highlight and emphasise the importance of retirement savings, and believes that the Budget Speech could offer clarity on issues that are already on the table.
Du Toit said: "Useful clarity may come in the form of final implementation plans for taxation changes affecting contributions, certain aspects of the tax free savings vehicle, mandatory preservation and implementation thereof, possible proposals on post retirement aspects of the reforms, such as default annuities, or even on the potential national savings fund.
"One of the concerns from a savings point of view would be possible increases in taxes on interest, dividends or capital gains, particularly if they affect investment growth, as this may have a unfavourable impact on the propensity to save."
On the other hand, Muller noted that retirement reform has been a topic in the Budget Speech for the last several years. "Towards the end of last year National Treasury decided to delay the introduction of changes that deal with the harmonising different types of retirement funds (pension, provident and retirement annuity funds). One of these changes meant that people would not have been able to receive the full amount accumulated in a provident fund at retirement, but they needed to invest at least 2/3 to receive an income during retirement and only receive a maximum of one third at retirement.
"These reforms were due to be implemented on 1 March 2015, but have been postponed until 1 March 2016. That is why we expect that more clarity on this issue may emerge in the Budget Speech," she said.
One way in which retirement reform may be mentioned is through the introduction of the government's tax free savings accounts which are due to flood the market in March 2015. These vehicles, which have often been mooted as a way to boost retirement savings, is one of government's strategies to encourage saving within the country too.
The question remains whether or not the tax free savings accounts will work as an incentive for savers. Muller highlights that there are several alternatives to the tax free savings account, one of them being retirement annuities and these need to be considered when planning for retirement.
Muller explained: "Both retirement annuities (RAs) and tax-free savings accounts (TFSAs) earn tax-free investment returns. However, RAs defer income tax to the post-retirement phase, whereas with TFSAs income tax is paid before every contribution is made. When compared on a like for like basis for retirement RAs give the same or better value compared to a TFSA when used for retirement saving. This is due to the numerous post-retirement tax-benefits available to individuals who save through RAs.
"This is, however, only a numerical comparison and there are a number of factors to consider which vehicle will be the best for you specifically other than tax. A proper financial plan will allow you to look at your financial priorities and what you already have and then determine how much you need to save in different products to be able to best manage your financial priorities. Tax-free savings accounts for example offer you liquidity whereas with an RA there are other benefits like protection from creditors. All these factors need to be considered."
First National Bank has already released the details of its two tax free savings account options, with other financial institutions set to release the details of theirs in the coming weeks.