Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
59. Tax free savings accounts and Retirement annuities explained
Unlock the secrets of optimizing your tax season strategy with Candace from Allan Gray, our expert guide through the labyrinth of financial planning. Discover how the right moves before the February deadline can significantly boost your future wealth. We unpack the art of strategic contributions to retirement annuities and tax-free investments, and dive into why tax-free savings accounts are a marathon, not a sprint, in the realm of wealth accumulation. Candace also sheds light on Allan Gray's approach to designating beneficiaries for tax-free accounts, making sure your legacy is as well-managed as your investments.
Navigating the complex currents of investment fees and regulations need not be a solo journey. With Candace's insights, we scrutinize the Allan Gray balanced fund's unique fee structure and the compelling dynamics between performance and fixed fees. Learn how Regulation 28 acts as a guardian for your retirement savings, ensuring your nest egg is diversified and not overexposed to market volatility. And for those who seek to maximize retirement fund contributions and minimize tax liabilities – we highlight the crucial role of a financial advisor. Don't let the allure of tax-free accounts lead to hasty withdrawals that could capsize your contribution limits; we emphasize the importance of keeping your eyes on the long-term horizon.
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Welcome to Know your Money, where we will explore our relationship with money and how the psychology of it impacts our financial decisions, as everyone thinks about money differently. In our podcast, we'll be presenting a variety of financial topics in an easy to understand way, which we hope will assist you with managing your money. Hello everybody, welcome to Know your Money guys. How are you today?
Speaker 2:That's hot, craig, I'm going to go first. Very well, and you, bronwyn Craig, you look great.
Speaker 3:All good thanks, hi Bron Warren Hello.
Speaker 1:Who's in the?
Speaker 3:studio. Is somebody else here today?
Speaker 1:Yes, so today we have Candice Duplicey from Alan Craig. Hello Candice.
Speaker 4:Candice is our business development.
Speaker 1:But she'll explain a little business development. She will just explain a little bit of what that is and what her other role is at Alan.
Speaker 4:Gray. Hi everyone, I'm so excited to be here. I am the assistant regional manager in Johannesburg in our distribution team and I'm also a business development manager, so essentially I support independent financial advisors and I help them develop their businesses.
Speaker 1:Awesome stuff, and that's definitely the reason why you're here today. It's not just to help us develop our business, but it's to help our clients develop the best that they can or make the best use of things. The reason we have Candice here today is because tax season is coming up and we just found that you've got to make the most of your taxes. And what does that even mean? What should you be putting it in and what are the different kind of products? So, candice, I don't know if you want to start somewhere and just explain that.
Speaker 4:Sure. So that's probably the busiest time for financial service providers, because you have until the end of February to basically use up your contributions within a retirement annuity and a tax-free investment and I'm sure we're going to unpack that shortly so you haven't until the end of February to basically use up your contributions for a tax-free and an RA.
Speaker 1:Okay, awesome. So I think let's start with the easy one, which is a tax-free. What is it? How can people use that up? What are the things?
Speaker 4:Sure. So I'm sure everyone knows that as a country, we have a very poor savings culture and in 2015, national Treasury came up with this product, which is called the tax-free savings product, because they wanted a product that would encourage people to save. So you can put up to 36,000 rand into this vehicle called a tax-free savings account per year, and this runs from one March to the end of February. You don't have to put 36,000 rand, you can put anything less. It is a long-term savings tool and the benefit of this product, as the word says, it is tax-free, which is an amazing opportunity for you to put money into this product and, ideally, you want to forget about it.
Speaker 1:But that's one important thing I think you said is a lot of people use this as their emergency fund, but your tax-free should be a long-term investment.
Speaker 2:Just understand it. So it's tax-free on the amount you put in. Is it capital gains tax-free?
Speaker 4:Every tax, every tax.
Speaker 2:So you don't pay any capital gains tax.
Speaker 4:You don't pay dividend withholding tax. There are absolutely no taxes Free money.
Speaker 1:But people often use that for the short-term things and there's actually a restriction. So first of all it's restricted to 36,000 a year, then it's restricted to 500,000 in your lifetime.
Speaker 2:Oh, okay, okay. So you can't just start it when you're like 17, 18.
Speaker 1:And you can't just throw thousands and thousands in it there is a restriction, but it's important to make use of that when you're doing your financial planning foundations or your blocks. This is one of those important areas to start at.
Speaker 3:but, saying it again, it's a long-term savings, but I think if you start well, look at the maths back to the snowball down the mountain, find interest how important that is. If you start at young and you did say you contribute the maximum every year It'll take around 16 years for you to get to the 500,000. That's about is okay about that.
Speaker 2:Does the fund have to close then, or can it continue to?
Speaker 3:capital gains Correct, it continues to accrue. So you say for I think it's 13 years or whatever gets you to the 500, you stop saving because you can't you know, more yeah let's say Treasury hasn't increased it, yeah, and you at your maximum. And then you just leave it there, staying in the product to continue growing and lovely retirement. Exactly so that's. That's a one very good way of doing that as well. So the tax inside the product is the same as a retirement annuity.
Speaker 4:Correct, so you absolutely pay no tax within the product.
Speaker 4:So to make this real is if you put money into a unit trust and you put money into a tax free as an example and remember we spoke about this concept, unit trust funds and let's say your fund performed and it did 15% for a year, that's your return. In a tax free product, you would take home this 15% like that would be your return on your statement, because there's absolutely no taxes within the product, whereas if you put it in a unit trust, it would be slightly less because you experienced tax within the product.
Speaker 2:Yes, I understand yeah.
Speaker 3:And another unique feature on the Ellen Gray tax free is that you are able to nominate a beneficiary Correct.
Speaker 4:It is a unique option that we offered we opened it on in our life company which allows you to nominate a beneficiary. So what that essentially means is, if you pass away, we can pay your tax free monies to your beneficiary, and it basically you won't. It would form part of your estate, but you won't pay any executive fees on the product.
Speaker 3:So you don't have to wait five years or anything like that, correct?
Speaker 4:You don't have to wait for the state to be wound up. We can pay immediately to your, to your beneficiary, and they can decide whether they would want to open their own tax free or if they would want to basically withdraw the monies.
Speaker 3:So the premiums you pay monthly are those tax deductible.
Speaker 4:They are not.
Speaker 3:So therefore you consider an RA Correct.
Speaker 4:So a retirement annuity, which is also it's the most tax efficient vehicle offered in the market. So even though the tax free, you pay no tax within the product. The retirement annuity is basically more tax efficient because SARS actually gives your money back. They want you to contribute towards retirement annuity, so essentially you pay SARS less tax if you put money into a retirement fund.
Speaker 1:Are there restrictions on how much you can put into an RA and how does that work?
Speaker 4:Yes, so it is 27 and a half percent up to 350,000 Rand a year and you can put more than that. But that would be just a loud contributions you can go back and listen to that episode.
Speaker 1:Yes, it's a fantastic episode I listened to it myself, awesome Thanks.
Speaker 3:And then, candice, can you nominate the beneficiary on a retirement annuity? Absolutely.
Speaker 4:So we actually refer to it as a nominee. So you can nominate what we call a nominee, so you would indicate who you would want it to be paid out to in the event of your death. But it is subject to what we call Section 37C. So if you pass away before you've retired, the trustees of the fund would then do an investigation and they would check that you have, if you have, any dependence in the absence of the fund. In the absence of any dependence, they would then pay to your nominees. Then they would become beneficiaries because they would actually benefit from the product.
Speaker 3:So that's similar to a pension or a provident fund. 100 percent If somebody passes away, the board of trustees will make sure that whoever nominated is the correct people to receive the proceeds. It's the same as a retirement annuity.
Speaker 4:Correct. Yes, so dependents are always first. If anyone was dependent while you were alive, they considered first and then we consider your nominees.
Speaker 2:So, essentially, you would have both, wouldn't you? As financial planners, you would encourage people to have both of these attacks free and an RA.
Speaker 3:Absolutely Because the retirement annuity. It's going to save you tax while you're contributing to it, correct? You can't get hold of it, though, until you from 55 onwards, or you are restricted to when you can use the money. However, on the tax free, you're not going to get the deduction, but you can get it earlier.
Speaker 2:But to my limits into the contribution.
Speaker 3:Yes, both of them are not taxed. The product is in tax, so it's an incredible way of building wealth, same as compound interest. It's a really good way.
Speaker 2:Snowball, eh, yes, and upset yeah.
Speaker 1:And then just in terms of the funds, like are you restricted in your tax free and what funds you can choose? And in the retirement annuities?
Speaker 4:Fantastic question. So in your tax free we are, the, there's a specific funds that we give you access to because, as part of the product offering, the funds have to have what we call a fixed fee, the funds that you, the unit trust, funds that you're exposed to. So we usually have a separate list of funds that you can access, because these funds only have, they must have a fixed fee within the tax free product range.
Speaker 2:Is that? Is that a legal thing, or is that your Correct? What is a?
Speaker 4:fixed fee. It is a legal thing. So essentially it means we've got as an example, the Ellen Gray balanced fund, so we've got two versions of the fund in the tax free product range. We've got a fixed fee. That means we have to charge you one fixed fee. We can't charge you less or more to manage the funds Performance fees. So no performance fees allowed, right, 100% Good. Do you know what that is?
Speaker 2:What is a performance fee? Sorry, I'm going to jump in.
Speaker 4:So it is actually one of our values at Ellen Gray. So Ellen Gray, our founder, he put this in place. So he felt strongly that if we within the fund, if we perform well for a client, we would charge a performance fee because we've done well for you, so a portion of your performance we would take Is that as a percentage Correct? And then if we have not done well for you, then he feels strongly that we shouldn't take a fee.
Speaker 2:Then so you have incentive to do well. For me, exactly, that's a good way of doing it, yeah.
Speaker 4:That's exactly the reason why we have that in place. So there is incentive for our portfolio managers to do well, whereas with a fixed fee, that fixed fee is in place. Where the investment manager does well or not, he takes his fee.
Speaker 3:And that's legislation right.
Speaker 4:So for the tax-free? Yes, it's legislation that they insist for the tax-free product there's no performance fees. That's why we actually had to open a second version of the Ellen Gray balance fund with a fixed fee. Can I ask?
Speaker 2:one question Just so I understand Do does Ellen and Gray get taxed on their fees from the tax-free?
Speaker 4:So the income they create from their fee structure with the tax free saving for an individual do they then pay tax on that? Yes, because that would be seen as revenue for our company.
Speaker 2:Okay, so there's someone's getting tax Always, but in this case, it wouldn't be the investor.
Speaker 3:So can you also mention the RAs, or can you invest in any fund within the RAs, Correct?
Speaker 4:yes, so we've got a fund list and in this fund list you would have access to performance and fixed fee funds within that fund range.
Speaker 3:But you're asking about any fund, so I could put all my money in gold.
Speaker 4:Regulation 28. So regulation 28 is a law that was put in place I think it was 2012. And essentially, this was a rule that our government put in place because they didn't want you to take too much risk with the money in your retirement funds. So essentially, they limit how much money you can place offshore or into equities, so this is called regulation 28. So, as an example for equities, you're allowed to put in 75% of your assets.
Speaker 3:So that's the maximum.
Speaker 4:That's the maximum. So your account post 2012 always has to be regulation 28 compliant.
Speaker 3:And the list of funds on the Alangrae platform complies with that within the RAs right.
Speaker 1:Well, they'll say, yeah, so if you try and invest in Alangrae in one fund and it isn't regulation 28 compliance, they'll say you're not allowed to invest in this. You have to change.
Speaker 2:And is that the same for other vehicles like endowments and stuff like that?
Speaker 4:So regulation 28 doesn't apply to endowments but there are funds that you can access in the endowment that are regulated 28 compliant. So when you look at a fund fact sheet of a fund it actually has a little table and it tells you is this fund regulation 28 compliant or not?
Speaker 3:So it'll automatically comply the fund will automatically comply. It'll never go over.
Speaker 1:So I think back to why we were doing this episode. We said that it's February. What should people be doing? What exactly should they be doing, and sort of how or why, with everything that we've?
Speaker 4:said so, I'd encourage you to speak to your independent financial advisor to determine, ideally, what the maximum is that you can put into your retirement annuity or into your pension or private fund. And if you are in the position to, I'd encourage you to absolutely put in the maximum into your retirement fund, because that is the best way of how you can get money back from SARS or reduce your liability Correct. So that would be definitely the first thing and the second thing, if you are in the position to maximize your tax-free product, I would put in 36,000, and if you are in the position to and some clients even do it on a monthly basis and you can do it for your children, right.
Speaker 1:So you can do 36,000 for you, your spouse, your five children, 36,000 into each of them Absolutely.
Speaker 4:But the one thing to keep in mind, though we spoke about flexibility and Craig mentioned. You know there isn't flexibility within the retirement fund. You know you can only access it at the age of 55. There are some rules where you can access it before, like if you immigrate, et cetera, whereas the tax-free is flexible and you can access it at any point. But something to keep in mind that we mentioned earlier about the 500,000 that you can contribute over your lifetime. So it's the 36 per year, but 500 over your life.
Speaker 4:And we often see that people misuse the tax-free product in the industry and when they need money they withdraw from the tax-free, and I think this should be avoided at all costs, because what happens is when you withdraw from the product and I'll make use an example if I put in 10,000, and this week and God forbid something happens and I need this money next week and I take this 10,000 round out, not only have I not experienced the tax-free element or the tax benefit in this product, but now I've also reduced my lifetime limit from the 500 to 490,000. I can never get back that, you know, that 10,000 round any longer, and I think that's a really big thing. So people need to consider that when they put money into the tax-free, that it is literally the last place you want to touch, when you want to access money.
Speaker 1:Very important that, yeah, and also, I think another important thing to note is that if you do do it for your children and you had to last resort access that money, that child needs a bank account right 100%.
Speaker 4:So there's SARS actually has a ruling. So when you open a tax-free savings for a minor, yes, the parent obviously contributes to this. So we Craig mentioned you can reach that within 13 odd years if you put in 36,000 every year and then that money just sits there and it continues to grow. If the parent decides that they need to withdraw that money for whatever reason, it has to pay out to the miners bank account. So the miner has to have a bank account and we can only pay it to the miners bank account and that's a ruling from SARS.
Speaker 3:All right.
Speaker 2:Geez.
Speaker 3:So I think it's important this time of the year to look at what you're putting away into RAs Do you have a tax-free investment or not and to contact your financial planner and put that in place before the 28th of February.
Speaker 1:Awesome stuff. Thanks, cairns, that was amazing.
Speaker 2:Thanks, cairns. Thank you, lovely to have you on the show. Thank you, see you soon. Bye everyone.
Speaker 3:Thank you for listening. If you have enjoyed this podcast or like to subscribe, please visit our website wwwgrowthfpcoza. Information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.