Private Portfolio – Does it still make sense?
Admittedly I do not always realise the full impact a small change in legislation can have until faced with its implications in practical terms.
In July 2011 an amendment to the Income Tax Act was passed that dictates that from that date the contributions to Retirement Annuity Funds that are not registered with NAMFISA will not be allowed as deductions for income tax purposes.
The impact of this may not have been realised by a number of people who diligently contribute to old retirement annuity policies that fall foul of this amendment.
These policies may be linked to funds that were approved by the Minister of Finance in the years prior to 2011. Their approval was the only requirement then.
Many of these funds are now however deemed to be South African and existed here prior to the creation of NAMFISA. These funds (or policies) are however not registered with NAMFISA and from the tax years ending February 2012, the contributions/premiums to such funds/policies do not qualify for a tax deduction.
There may however be many tax payers out there who have submitted their contribution certificates with the annual returns as they did in the past.
They may be in for a surprise discovering that the claimed deduction is disallowed once they eventually receive an assessment. I do not want to mention possible penalties and interest.
This whole issue has however a further unfortunate side to it. The tax law further provides that should one receive an annuity at retirement from an annuity fund it is taxable here if any contribution thereto was allowed as a tax deduction.
So, if you deducted only one contribution, the full annuity is taxable here. This in effect means that when it comes to all these old retirement annuity policies that cannot be deducted any longer, they will one day have one grateful beneficiary namely the local Receiver of Revenue.
Since one can not retire before age 55 at the earliest, these policies usually have a relatively long investment term that can translate into a substantial accumulation of value.
The Receiver does not need to allow a tax deduction, but when the proceeds are eventually paid, the annuity that comes out of the proceeds can be taxed in full.
From this it is obvious that there will be little interest or will from neither the authorities nor the industry to address this issue. The latter can replace these old policies with new Namibian business. The party that bears the brunt is the fund member.
He will have to decide whether to continue contributing without tax relief or stop contributing, breach the savings contract, face the penalties and see what he will eventually receive at retirement.
This scenario has led me, who on numerous occasions advocated contributing to retirement annuity funds as essential for providing for retirement, with some serious questions.
Since such fund policies lock you in until age 55 at the earliest any small change in the law, political situation or change of residence can have consequences that you can not react upon and it involves a major asset that was meant for retirement.
Does this still make sense in our age of globalisation and continuous change?