The 2024 Budget – What Does it Mean for Your Retirement Savings?

The 2024 Budget was delivered by the Minister of Finance against the global backdrop of geo-political tensions, wars in the Middle East and Ukraine and slowing economic activity. On the local front, the Minister of Finance had to consider a stuttering economy, crumbling infrastructure, high unemployment levels, a rapidly deteriorating fiscal position, a general lack of business and investor confidence, cash-strapped households, and the prospects of the upcoming national election. The election is viewed by many as the most significant since the democratic elections of 1994 and put the Minister in a position where he had to compromise on key matters in order to juggle many balls, none of which he had the luxury to drop.

Key Budget Announcements

Leading up to the Budget the key areas of focus identified by economists and investors included economic stimulus and reform, fiscal consolidation, infrastructure repair and development, unemployment, and the possible tapping into a portion of the Gold and Foreign Exchange Contingency Reserve Account.

The key takeouts from the 2024 Budget are:

• • Projected SA economic growth of 1.3.% for 2024 (SARB 1.2%), rising to 1.6% by 2025 and 1.8% in 2026 to average growth of 1.6% for 2024 to 2026.
  • Budget Deficit of 4.9% of GDP for 2023/24 that is expected to decline to 3.3% by 2026/27
  • Revenue shortfall of R56.1 billion for the 2023/24 fiscal year, due to lower corporate tax
  • Total Government Debt : GDP ratio expected to peak at 75.3% in 2025/26
  • R150 billion from the Gold and Foreign Exchange Contingency Reserve Account to be used to mitigate fiscal risk by limiting debt issuance by the government.
  • Debt service costs of R382 billion for the 2024/25 fiscal year to represent 21 cents of every R1 of tax revenue received.
  • Fixed investment to grow by 3.7% in 2024 and improving to 4% in 2025 before stabilising at 3.6% in 2026.
  • No additional allocations to State Owned Enterprises other than Eskom and Transnet
  • Fiscal drag due to personal income tax, rebates and medical tax credits remaining unchanged.
  • R5 billion can be raised in 2024/2025, as fund members access once-off withdrawals due to the implementation of the two-pot retirement system, assuming R26 billion of withdrawals.
  • Introduction of global minimum tax rules at 15% is expected to increase corporate tax collection by R8 billion in 2026/2027

A tight fiscal situation limits the SA government’s ability to meaningfully improve the local economic growth prospects over the medium term. This creates a challenging environment for savers, investors and retirement funds looking to grow their retirement monies, in both nominal and real terms. Substantial bond issuance by the government and weak country credit ratings can put bond prices under pressure and keep yields elevated. Slow economic growth, a lack of business and investor confidence, continued delistings of companies from the JSE, a volatile rand, and global equity markets reduce the return potential of the local equity market and make decision-making by asset managers and investors increasingly complex. In addition, households will struggle to improve their savings rates as bracket creep, lower wage and salary increases and less disposable income put further pressure on their monthly cash flow.

Addressing the Retirement Savings Challenge

While retirement fund trustees and management committees and self-employed individuals do not control the outcomes of the Budget and the macro-economic environment, there are various steps they can take to achieve their retirement goals and objectives. 

From a retirement fund perspective, Trustees and Management Committees need to ensure that their retirement funds are optimally structured for the best outcomes for members at retirement.  Elements of a well-structured retirement fund include the following:

• • The appointment of advisors who can provide truly independent and quality advice that is tailor-made for the unique needs and member profile of the fund.
  • Well-designed benefit package that allows for the optimal allocation of monthly contributions to the benefits that members require, e.g. avoiding over-insurance at the expense of investment contributions.
  • A robust investment strategy that can protect the benefits of retirement fund members while providing access to investment opportunities for real investment growth above inflation.
  • The life stage model needs to allow for members to be invested appropriately according to the time horizon they have until retirement which will allow their savings to work as hard and as long as possible for them. This also requires that the 13B member administrator will need the technical capabilities to administer a well-designed default life stage model.
  • Well-diversified investment solutions or life stage building blocks with mandates that speaks to specific real return outcomes and that allow the asset managers to use the full range of asset classes (local and offshore), strategies and instruments available in the market.
  • An effective communication policy that keeps members informed about their benefits, investment and annuity options, rule changes and education elements to improve financial literacy. An example will be the introduction of the Two Component system from 01 September 2024 which will require members to understand the impact that withdrawals from the savings component will have on their outcomes at retirement.
  • Annual net replacement ratio analysis at fund and member level to determine the overall readiness of fund members for retirement and if the retirement fund’s contributions and investment strategy are effective and appropriate.
  • Strong focus on costs and benefits provided with a value for money rather than the cheapest is the best approach. This includes advisor fees, administration fees, asset management fees and the premiums for risk benefits.
  • Providing an in-fund annuity to retiring members that allows for a smooth transition of their savings and institutional cost benefits.

From an individual perspective, a self-employed person or small business owner needs to make sure that the following retirement planning elements are in place for them and their staff:

• • Access to a qualified and certified financial planner who can help with setting goals and providing the necessary advice and guidance on the most effective way to save and invest for retirement.
  • Ensuring that the appropriate risk benefits and healthcare coverage are in place to provide the necessary accident, disability, death, and medical insurance protection.
  • Using a retirement annuity to maximise the annual tax-deductible retirement contributions, which are limited to the lesser of R350 000 or 27,5% of the higher remuneration or taxable income.
  • Using a tax-free savings account for any additional savings above your formal retirement savings limit. An annual limit on contributions of R36 000 or a R500 000 lifetime limit applies.
  • Preserve retirement savings to the date of retirement by not dipping into your retirement savings as far as you can avoid it.
  • Taking sufficient investment risk during the time invested to achieve real returns and not becoming too conservative too soon when approaching and moving into retirement.
  • Annual reviews with an advisor to determine if everything is on track to meet the retirement goals and objectives and, if not, what adjustments need to be made.

With the 2024 Budget behind us, we have a clearer picture of the challenges faced by retirement funds, self-employed individuals, small business employees, advisors and asset managers. Most of these challenges can be addressed by means of an appropriate retirement fund structure, quality independent advice, a robust investment strategy, the discipline to preserve, managing service costs and annual service and performance reviews.