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Retirement Planning
Sunday, April 1, 2007
No luxury

The Social Security and Retirement Reform discussion paper, published by the National Treasury in February 2007, sets out proposed reforms to the retirement funding landscape.

According to Tiny Carroll, an estate planning specialist at Glacier Fiduciary Services (part of the Sanlam Group), “Reforms will see the introduction of two tiers of contributions. The first tier will comprise mandatory, earnings-related contributions to a national social security scheme to provide improved unemployment insurance, disability and death benefits and a standard retirement savings arrangement.
“The second tier will consist of mandatory supplementary contributions to private occupational or individual retirement funds, for individuals earning above a threshold amount – still to be decided. This is to ensure that all individuals make appropriate provision for sufficient income during retirement.”
Government has indicated that it is not interested in funding so-called luxury retirements – through the tax system. The tax implications of retirement fund contributions have not yet been finalised, but will in all likelihood, allow for:
• tax deductions of mandatory contributions;
• limited tax deductions of supplementary, voluntary savings; and
• a ceiling on tax deductibility.

Once the monetary ceiling has been reached, and tax deductibility is no longer a consideration, the choice of an appropriate investment vehicle will be driven largely by other factors.
Advantages such as protection in the event of insolvency, and the exemption from estate duty afforded to annuities received in consequence of membership of a fund will be lost to investors wishing to make additional (necessary) contributions towards their retirement outside of the retirement funds net.
However, by establishing a trust and paying the voluntary contributions to the Trust (by using the annual donations tax concession), the investor will enjoy the following benefits :
• savings are protected in the case of insolvency and even divorce (not the case for retirement funds);
• unlimited tax free lump sum at retirement
• drawings are not necessarily subject to income tax and CGT;
• savings don’t form part of the estate for estate duty purposes;
• borrowing money from the trust to use for living expenses - creates a debt in the estate, leading to a further reduction in the planner’s estate for estate duty purposes.

“Establishing a Trust is a fairly simple process,” says Carroll. “The first step is for the investor to establish a living trust, which will then invest the donated capital in a sinking fund (a policy without a life assured) or an endowment with multiple lives assured. Individuals can donate R100 000 a year (R200 000 for couples) to the trust by making use of the annual donations tax allowance.
“At retirement (at least 5 years), the trust may make capital withdrawals from the investment and pay the money to the investor as one of the beneficiaries of the trust. One of the advantages of living off capital is that it does not add to the investor’s income tax burden.”
The opportunity to make additional provision for retirement without increasing the value of the estate, together with the potential for tax saving, ensures that trusts remain one of the most popular estate planning tools.

Copyright © Insurance Times and Investments® Vol:20.3 1st April, 2007
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