Do it yourself. It's not difficult. I always say you only need an advisor when you have a **** load of money and need creative ways to structure the tax, estates, etc. You can do investments, RA, etc. yourself through any of the companies: Sygnia, 10x, etc. You will save so much over time it is crazy. How fees take a big bite out of your retirement savings.
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RA's for dummies...
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Do it yourself. It's not difficult. I always say you only need an advisor when you have a **** load of money and need creative ways to structure the tax, estates, etc. You can do investments, RA, etc. yourself through any of the companies: Sygnia, 10x, etc. You will save so much over time it is crazy. How fees take a big bite out of your retirement savings.
3% is high. With Sygnia and 10x you paying like 0.4%...
The_Ogre
Honorary Master
OK, let me jump on this as well. I have a paid up RA with Old Mutual - I made it paid up around 3 or 4 years ago not know what "paid up" actually meant.
It's grown almost NOTHING since!
To whom do you guys recommend I transfer it? Risk profile: the most aggressive there is (might as well since I won't be able to use it for more than 20 years). Also what are the associated costs of moving?
It's grown almost NOTHING since!
To whom do you guys recommend I transfer it? Risk profile: the most aggressive there is (might as well since I won't be able to use it for more than 20 years). Also what are the associated costs of moving?
The_Ogre
Honorary Master
Thanks for the advice, Russell!
now you have my attention. Care to provide a few crumbs or if feeling generous the whole loaf?
tia!
zerocool2009
Honorary Master
Think you totally missed my statement. Let me say it in easier language ...
You pay 3% over 40 years. Does that now makes more sense ?
akescpt
Honorary Master
No that figure is right for sygnia. You must have over a million for the .4% at 10x probably. Under a million its .9% when I enquired.
How do you plan on limiting costs to 3% over 40 years - that is 0.07% per year.
The lowest cost equity fund on the planet (Vanguard 500 index fund) has an expense ratio of .16% pa.
zerocool2009
Honorary Master
I am not planning to investing in RA's. The little one that I have is one big mess ! Ombudsman cases going.
There are way better ways to invest than in RA's and enriching companies !
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If you not in a RA (or pension fund, etc) then you losing a ****load of your salary to SARS. Unless you happy to give your hard earned money away for politicians to waste on more Nkandlas, jets, Q7s
Well there is not a low cost index fund in SA (or worldwide) charging close to .07% pa. (if you want to use equity unit trusts in SA you will pay at least 0.4% pa = 17% over 40 years).
A DIY stock portfolio will cost more than 0.07%pa in trading costs - depending on size you will struggle to pay less than 0.2%pa provided your turnover is low.
Your only option is bank fixed deposits or retail bonds, but there actually is a cost. A low cost money market/bond fund unit trust will beat a DIY fixed interest portfolio due to economies of scale (so a hidden cost).
It will also not be wise to have no growth asset exposure in a retirement portfolio.
Offshore equity exposure is important and will cost +- 0.5%pa.
Tax will kill you if you avoid wrappers like RA's and TFSA's.
Tax is also a bigger problem on interest bearing investments.
now you have my attention. Care to provide a few crumbs or if feeling generous the whole loaf?
tia!
OK, I was exaggerating – you will still pay VAT, sin tax, fuel levies, perhaps a bit of income tax, CGT and dividend tax – but it should be minimal.
Here’s a hypothetical example of a 49 year old couple planning their retirement in 16 years at 65. (I chose 16 years as it is the time required to use the max R500000 TFSA contributions – I assume they contributed R20000 each in the 2016 tax year so 20000+16*30000 = R500000)
If they need R350000pa after tax in 2016 Rands to maintain their lifestyle, they will need to build up a portfolio of R7130000 before tax by age 65 to give themselves a very good chance of a sustainable retirement.
I assumed that there will be no fiscal drag over the next 16 years – so tax rates and rebates will adjust for inflation, except for the interest exemption (R34500 for over 65s in 2016) which will not be adjusted for inflation in future, so at 6% inflation it will be worth only R13500 in 2016 Rands in 2032.
The couple’s R7130000 (2016 Rands) portfolio will be invested as follows on the day before retirement (the result of good retirement planning):
RA or pension fund - R3150000 (in name of higher earning spouse), Tax free savings account R695000 in each of their names, Unit trust investments R1495000 in name of high earner(HE), R1095000 in name of low earner(LE).
At retirement HE takes 1/3 lump sum from retirement fund (1050000) costing R130000 in tax (rate 12.4%) and donates the R920000 + another R280000 of the unit trusts in HE name to spouse with no tax consequences. The rest of the retirement fund is used to purchase a living annuity.
So after retirement the assets are invested as follows:
In name of HE: Living annuity R2100000 TFSA R695000 Unit trust R1215000 total R4010000
In name of LE: TFSA R695000 Unit trust R2295000 total R2990000
Total retirement funds R7000000 – draw down 5% per year = R350000 to spend.
Tax:
Assume that they pay R5000pm for medical aid, then the maximum tax free income per spouse is:
Rebates (13500+7407+9993(medical)) =30900/.18 R171667 + 13500 (Interest exemption) = R185167
Actual estimated taxable income:
If the portfolio is invested 40% fixed income, 50% equities, 10% listed property
HE - LA drawdown R105000; Interest R58000; Property dividend R25000 = Taxable R188000
LE - Interest R171000; Property dividend R17000 = Taxable R188000
R188000 – Interest exemption 13500 = 174500
Income Tax = R510*2 = R1020
Dividend tax = R1160
Total tax R2180
Tax rate on R350000 retirement income = .6%
Sebulba
Well-Known Member
Wow, that is the kind of planning worth paying for. Not what FA's are doing these days.
Very nice comprehensive feedback. Just a couple concerns/things I'm not quite clear on..
One concern is possible tax implications of the UT donation in that scenario. SARS has anti-avoidance rules in place for situations where it seems donations have been made in measures to reduce income tax.
"In terms of s7(2) of the Act, any income received by or accrued to a person married in or out of community of property will be deemed to be income accrued to that person’s spouse, if the income was derived by the person in consequence of a donation made by the person’s spouse, and the sole or main purpose of the donation was the reduction, postponement or avoidance of the donor’s liability for any tax which would otherwise have become payable by the donor."
What do you make of the CGT consequences when drawing down from the UT portfolios. Are you assuming that any CGT amounts are within the tax free thresholds?
Where does the R9993 medical rebate come from? Since you're working in 2016 rand values should the medical rebate not be R6864 (R286 x 12months x 2members), and only applied to one of their taxable incomes? If they both pay their medical aid separately you're looking at R3432 per person.
Drawing down 5% of R7000 000 per year gives you R350 000 for 20 years but doesn't take into account the need for increased drawdowns every year to keep up with inflation. Is it assumed that the increased draw down requirements will be covered by interest earned on the investments during retirement, and if so, what is the interest rate assumption?
agreed - especially at only 50% equities, and 5% withdrawal, you're likely to deplete within 20 years.
One concern is possible tax implications of the UT donation in that scenario. SARS has anti-avoidance rules in place for situations where it seems donations have been made in measures to reduce income tax.
"In terms of s7(2) of the Act, any income received by or accrued to a person married in or out of community of property will be deemed to be income accrued to that person’s spouse, if the income was derived by the person in consequence of a donation made by the person’s spouse, and the sole or main purpose of the donation was the reduction, postponement or avoidance of the donor’s liability for any tax which would otherwise have become payable by the donor."
True, but I have never seen SARS invoke s7(2) except for very wealthy people (R100M + assets). This little scheme is being employed in practice by thousands of retirees with +- 10M savings.
In the hypothetical case here it would also be possible to invest the UT funds in the name of the LE spouse from the start, which would make it much more difficult for SARS to invoke s7(2) the argument being that it was invested out of an allowance paid by HE spouse. The general argument is that the donation/allowance's sole/main purpose is to reduce the spouse's dependence not to avoid tax.
What do you make of the CGT consequences when drawing down from the UT portfolios. Are you assuming that any CGT amounts are within the tax free thresholds?
Both spouses can realise cap gains of R30000 pa so R60000 in total. It is important to maximise the utilisation of this allowance every year during the accumulation phase. That is another reason why the UT investment should build up in both names. In this case harvesting cap gains up to the limit is sufficient to make CGT irrelevant. Other strategies include realising CGT in the name of the LE spouse in years when their marginal tax rate is very low (unit trusts can be transferred between spouses as a unit transfer without selling the units thus avoiding a CGT event). The first year or 2 of retirement can also be used to bring the marginal rate of the spouse with the RA down to a very low level by postponing retirement from the RA for a year or 2 and living off other investments - thus realising past CG at a low tax rate.
Where does the R9993 medical rebate come from? Since you're working in 2016 rand values should the medical rebate not be R6864 (R286 x 12months x 2members), and only applied to one of their taxable incomes? If they both pay their medical aid separately you're looking at R3432 per person.
For 65+ yo taxpayers the medical rebate in 2016 = (Medical expenses-286*12*3)*.333+286*12 so in this case (30000-286*12*3)*.333+286*12 =9993 per spouse. This is actually a very conservative estimate for over 65 med expenses.
Drawing down 5% of R7000 000 per year gives you R350 000 for 20 years but doesn't take into account the need for increased drawdowns every year to keep up with inflation. Is it assumed that the increased draw down requirements will be covered by interest earned on the investments during retirement, and if so, what is the interest rate assumption?
The asumption is that they start with a 5% drawdown in year 1 and increase the R350000 for inflation each year.
If the R7000000 investment earns 3% above inflation pa. it will last 31 years in this scenario. I agree this is an oversimplification.
"In terms of s7(2) of the Act, any income received by or accrued to a person married in or out of community of property will be deemed to be income accrued to that person’s spouse, if the income was derived by the person in consequence of a donation made by the person’s spouse, and the sole or main purpose of the donation was the reduction, postponement or avoidance of the donor’s liability for any tax which would otherwise have become payable by the donor."
True, but I have never seen SARS invoke s7(2) except for very wealthy people (R100M + assets). This little scheme is being employed in practice by thousands of retirees with +- 10M savings.
In the hypothetical case here it would also be possible to invest the UT funds in the name of the LE spouse from the start, which would make it much more difficult for SARS to invoke s7(2) the argument being that it was invested out of an allowance paid by HE spouse. The general argument is that the donation/allowance's sole/main purpose is to reduce the spouse's dependence not to avoid tax.
What do you make of the CGT consequences when drawing down from the UT portfolios. Are you assuming that any CGT amounts are within the tax free thresholds?
Both spouses can realise cap gains of R30000 pa so R60000 in total. It is important to maximise the utilisation of this allowance every year during the accumulation phase. That is another reason why the UT investment should build up in both names. In this case harvesting cap gains up to the limit is sufficient to make CGT irrelevant. Other strategies include realising CGT in the name of the LE spouse in years when their marginal tax rate is very low (unit trusts can be transferred between spouses as a unit transfer without selling the units thus avoiding a CGT event). The first year or 2 of retirement can also be used to bring the marginal rate of the spouse with the RA down to a very low level by postponing retirement from the RA for a year or 2 and living off other investments - thus realising past CG at a low tax rate.
Where does the R9993 medical rebate come from? Since you're working in 2016 rand values should the medical rebate not be R6864 (R286 x 12months x 2members), and only applied to one of their taxable incomes? If they both pay their medical aid separately you're looking at R3432 per person.
For 65+ yo taxpayers the medical rebate in 2016 = (Medical expenses-286*12*3)*.333+286*12 so in this case (30000-286*12*3)*.333+286*12 =9993 per spouse. This is actually a very conservative estimate for over 65 med expenses.
Drawing down 5% of R7000 000 per year gives you R350 000 for 20 years but doesn't take into account the need for increased drawdowns every year to keep up with inflation. Is it assumed that the increased draw down requirements will be covered by interest earned on the investments during retirement, and if so, what is the interest rate assumption?
The asumption is that they start with a 5% drawdown in year 1 and increase the R350000 for inflation each year.
If the R7000000 investment earns 3% above inflation pa. it will last 31 years in this scenario. I agree this is an oversimplification.
If the return = inflation the portfolio will last 20 years, anything above inflation will last > 20 years. 20 years is close to worst case scenario unless the 50% in equities experiences a once in 100 year stock market crash in the early years. Increasing the % in equities will only worsen the worst case scenario.