Retirement and self-sabotage in South Africa

[BusinessTech]

Retirement and self-sabotage in South Africa

Even after the final reforms are in place investors will remain free to be their own worst enemy, writes Mica Townsend, business development manager and Employee Benefits Consultant at 10X Investments.

 

[supersunbird]

Retirement and self-sabotage in South Africa

Even after the final reforms are in place investors will remain free to be their own worst enemy, writes Mica Townsend, business development manager and Employee Benefits Consultant at 10X Investments.

As it should be. Mandatory preservation has it's own issues, savings in a retirement fund won't buy you food if you are retrenched or fired (if saving in an RA one should be aware that one cannot access the money in same situation). If you want to emigrate, you can quit your job and take your money (now RAs and one-withdrawal-done Preservation Funds have a 3 year waiting period when done emigrating).

If people want to pay the below taxes cause they think they can do better than say 27% a year (*coughs in MTI and that "professor" conman who was recently sentenced*) then so be it.

 

[JayM]

As it should be. Mandatory preservation has it's own issues, savings in a retirement fund won't buy you food if you are retrenched or fired (if saving in an RA one should be aware that one cannot access the money in same situation). If you want to emigrate, you can quit your job and take your money (now RAs and one-withdrawal-done Preservation Funds have a 3 year waiting period when done emigrating).

If people want to pay the below taxes cause they think they can do better than say 27% a year (*coughs in MTI and that "professor" conman who was recently sentenced*) then so be it.

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How is it 27% a year?

 

[Pegasus]

How is it 27% a year?

If you add R100 000 a year to your RA, you get R27000 of that back from SARS.
So 27% return for the year.
(Depending on your tax situation.)

 

[JayM]

If you add R100 000 a year to your RA, you get R27000 of that back from SARS.
So 27% return for the year.
(Depending on your tax situation.)

But that's only 27% on newly added funds.

1) It doesn't give you 27% growth on your previous contributions.
2) Returns in the local market are poor compared to offshore.
3) Geopolitical risk - the end result is your entire sum of contributions could be worth R0.00 when you retire.

 

[Scooby_Doo]

If you add R100 000 a year to your RA, you get R27000 of that back from SARS.
So 27% return for the year.
(Depending on your tax situation.)

This is lazy maths.

 

[Pegasus]

But that's only 27% on newly added funds.

1) It doesn't give you 27% growth on your previous contributions.
2) Returns in the local market are poor compared to offshore.
3) Geopolitical risk - the end result is your entire sum of contributions could be worth R0.00 when you retire.

You got 27% last year as well, and the year before.

You also have 27% more money to invest every year.

 

[Scooby_Doo]

But that's only 27% on newly added funds.

1) It doesn't give you 27% growth on your previous contributions.
2) Returns in the local market are poor compared to offshore.
3) Geopolitical risk - the end result is your entire sum of contributions could be worth R0.00 when you retire.

Contribution I made to an RA 5 years ago has grown 20% total.

Contribution I made to the S&P 500 on the same day, is up 128%.

 

[Pegasus]

This is lazy maths.

What was the question?

 

[supersunbird]

How is it 27% a year?

I mean, how long do they want to take to be in the same position (and I'm not even including opportunity cost of the 27%) again after the 27% tax they paid to government?

 

[Vrotappel]

Self sabotage is voting for the ANC.

 

[Drifter]

If you add R100 000 a year to your RA, you get R27000 of that back from SARS.
So 27% return for the year.
(Depending on your tax situation.)

Not anymore.

 

[Pegasus]

Contribution I made to an RA 5 years ago has grown 20% total.

Contribution I made to the S&P 500 on the same day, is up 128%.

If you added R100 000 each year to both on the same day each year, and reinvest your tax break from SARS into your RA every time, how would you do?

Let's say that the underlying investment is the same for both.

 

[3WA]

Let's say that the underlying investment is the same for both.

Why would the underlying investment be the same? The whole point of paying the tax is to escape Reg 28.

 

[Pegasus]

Why would the underlying investment be the same? The whole point of paying the tax is to escape Reg 28.

Why do you think I'd mention that?

 

[3WA]

Why do you think I'd mention that?

Misunderstood your initial comment.

 

[JayM]

I mean, how long do they want to take to be in the same position (and I'm not even including opportunity cost of the 27%) again after the 27% tax they paid to government?

I've managed 14%/y in USD since I cashed out my provident fund a few years ago. Invested locally it was getting 3% in ZAR for the previous 5 years. I don't think it'll take long before I break even, and I've also removed risk of having my pension stolen. If you're leaving SA, I think it's a no-brainer to just pay the tax and be free of the effects of a sovereign default (which is almost a certainty at this point).

 

[Scooby_Doo]

If you added R100 000 each year to both on the same day each year, and reinvest your tax break from SARS into your RA every time, how would you do?

Let's say that the underlying investment is the same for both.

Well let's find out... This is the only data I have, would have to extrapolate out to include multiple years.

RA

R100 000 + tax saving from SARS (lets assume the maximum 45%) = R145000*1.2 = R174 000

Discretionary

R100 000 + no tax savings from SARS = R100 000 *2.28 = R228 000

The maths gets more complicated on drawdown date, as the full amount of the RA is taxable as income but your discretionary will only be capital gains which has an inclusion rate of 40% currently.


If SA was not a **** show then yes an RA would make sense. But its a **** up waiting to happen, and once that fiscal cliff is hit...

 

[Pegasus]

Well let's find out...

RA

R100 000 + tax saving from SARS (lets assume the maximum 45%) = R145000*1.2 = R174 000

Discretionary

R100 000 + no tax savings from SARS = R100 000 *2.28 = R228 000

The maths gets more complicated on drawdown date, as the full amount of the RA is taxable as income but your discretionary will only be capital gains which has an inclusion rate of 40% currently.


If SA was not a **** show then yes an RA would make sense. But its a **** up waiting to happen, and once that fiscal cliff is hit...

Talking about lazy maths....

 

[Scooby_Doo]

Talking about lazy maths....

Here is my calculator results, if you maintained that investment over 5 years, you would be flat even. Notice the difference in returns over the last 5 years.

RA



Discretionary



If you push that out to 10 years...

RA



Discretionary



Beyond this, contributions from you into an RA are far smaller than amounts that you get from the return rate.


Edit,

Not sure how to calculate it, but a good question to ask ourselves is based on how much time you have left until retirement, how much higher would your discretionary investments return rate need to be to outperform a similar investment into an RA?