Some financial advice

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mrichard

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Hi all, I have been doing a little reading (skimming) regarding investments, interest, tax, and retirement funds. And want to re-evaluate my financial decisions. This thread can possibly also assist young professionals in my positions. I have been working for 3 years and want to try maximise long term gains.

Retirement funds
I have had my provident fund contribution set to the minimum (7.5%) at my employer, and I have been saving excess funds elsewhere and eventually used most of it to partially purchase my apartment. Also note, my employer does not make any contribution to my provident fund.
I did a quick check, and if I set it to max (27.5%) my contribution will increase by R5000 per month, my salary will decrease by R3500, and I will pay R1500 less tax per month.

Now the tax break is a good thing in the long term, however as I have heard before, you save on tax now, but you eventually still pay tax when you withdraw your provident fund. But from my brief research, after 55 the first R500k is tax free, thereafter brackets apply (18% to 39%). And the two thirds that has to go into a living annuity, is that also tax free?
Even if you withdraw from the provident fund before 55, you still pay less tax than you would have if you your provident fund contribution was set to less.

Now my question is, would it be best tot max out my provident fund contribution, as I will be able to afford taking R3k less salary a month for the tax benefits?

Furthermore, there will be no further tax benefits above the 27.5% contribution, for example, I would not benefit from opening a separate Retirement Annuity? My next step is my Tax free savings account which I have been maxing for the past 3 years, and what is after that?


In summary:
  • Is it best to max out your provident fund contribution to 27.5% if you can afford it?
  • After provident fund, best to max out Tax Free Savings Account?
  • And what is the best to do with any further savings money after that?
 
I can't find the article right now, but someone did the maths and it's best (tax wise) to first max out your TFSA (but make sure you're in equities with EFT's), then tackle your RA/Pension/Provident up to 27,5%.

Any money left after that, and you have some good problems. But it really depends what you want the money to do for you. If it's long term, just stick it in well diversified ETF's. If short term, then a cash, or near-cash product.

I recommend the following content to educate yourself:
https://www.takealot.com/manage-your-money-like-a-f-cking-grown-up/PLID48608525
https://justonelap.com/the-fat-wallet-show/
https://investorchallenge.co.za/all-articles/
http://www.stealthywealth.co.za/p/archive.html
 
jman said:
I can't find the article right now, but someone did the maths and it's best (tax wise) to first max out your TFSA (but make sure you're in equities with EFT's), then tackle your RA/Pension/Provident up to 27,5%.
Click to expand...

I saw this research too, but given the low caps on the TFSA (even if they are adjusted for inflation each year), it doesn't make a huge difference.

The way I like to think about it is that I'm maxing out my TFSA with the tax saving from my Retirement contributions. Makes me feel like I'm getting the best of both worlds.

One other thing to remember is that when you retire, if you're in a Living annuity, you can set your draw-down rate for maximum tax benefit if you have other assets you could access (eg TFSA) until you get older and the tax benefits are greater.
 
Given how poorly everything did last year, and the direction of this country, I stick to minimum contribution for RA, service debt (home or car loan, because that’s guaranteed value), Max TFSA and throw some extra into ETFs (all foreign denominated funds).

TFSA and pay off your home loan (if you still have one on the apartment).
 
mrichard said:
Hi all, I have been doing a little reading (skimming) regarding investments, interest, tax, and retirement funds. And want to re-evaluate my financial decisions. This thread can possibly also assist young professionals in my positions. I have been working for 3 years and want to try maximise long term gains.

Retirement funds
I have had my provident fund contribution set to the minimum (7.5%) at my employer, and I have been saving excess funds elsewhere and eventually used most of it to partially purchase my apartment. Also note, my employer does not make any contribution to my provident fund.
I did a quick check, and if I set it to max (27.5%) my contribution will increase by R5000 per month, my salary will decrease by R3500, and I will pay R1500 less tax per month.

Now the tax break is a good thing in the long term, however as I have heard before, you save on tax now, but you eventually still pay tax when you withdraw your provident fund. But from my brief research, after 55 the first R500k is tax free, thereafter brackets apply (18% to 39%). And the two thirds that has to go into a living annuity, is that also tax free?
Even if you withdraw from the provident fund before 55, you still pay less tax than you would have if you your provident fund contribution was set to less.

Now my question is, would it be best tot max out my provident fund contribution, as I will be able to afford taking R3k less salary a month for the tax benefits?

Furthermore, there will be no further tax benefits above the 27.5% contribution, for example, I would not benefit from opening a separate Retirement Annuity? My next step is my Tax free savings account which I have been maxing for the past 3 years, and what is after that?


In summary:
  • Is it best to max out your provident fund contribution to 27.5% if you can afford it?
  • After provident fund, best to max out Tax Free Savings Account?
  • And what is the best to do with any further savings money after that?
Click to expand...

You pay tax on the Life/Living Annuity income.

Are you happy with the Provident Funds methodology/strategy. If yes, invest more in it, if not (say it's an expensive managed fund), then get an RA of your choice that you like.
 
Masataka said:
Given how poorly everything did last year, and the direction of this country, I stick to minimum contribution for RA, service debt (home or car loan, because that’s guaranteed value), Max TFSA and throw some extra into ETFs (all foreign denominated funds).

TFSA and pay off your home loan (if you still have one on the apartment).
Click to expand...
Luckily, I do not have any debt other than my apartment, which I should be able to settle in the next 3 years. My lending rate is 8.5%, so not too much worries there.

As for TFSA, I am only buying US, and some global ETFs. I already have a money in SA top 40, but not adding more.

supersunbird said:
You pay tax on the Life/Living Annuity income.
Are you happy with the Provident Funds methodology/strategy. If yes, invest more in it, if not (say it's an expensive managed fund), then get an RA of your choice that you like.
Click to expand...

My company is with retirment on-line (Sanlam is the fund administrators), I can choose my allocation percentage to some funds like Allan Gray Global balanced, Investec Global Balanced, Coronaion manged, IS FullVest and some others.
The fees are (as percentages of fund salary) for admin (0.15%), death benefit (1.3%), disability benefit & trauma (1.1%). And fees as % of fund value are: Investment consulting (0.15%), Sanlam investment admin fee (0.023 if assests), and Investment manager fees as per fact sheet of selected fund.

I might look into opening an RA elsewhere. I have an easy equities account for my TFSA, I see they have some RA options for Emperor Asset management or cannon asset mangers funds. Not too sure about these and the fees. Will have to do some research. The thing with the company provident fund is that they will do my taxes and my payslip gets adjusted accordingly, with an RA, it adds some manual tax submissions.

Maybe someone has a good suggestion for a DIY RA with low fees?
 
Just bear in mind the flexibility you lose with retirement products. You going to be in SA forever? Want to invest in soe's?

Yes there is a tax benefit in contributing to retirement products, but worth having some flexible investments also, and use the capital gains/ interest exemptions you have. No penalties if you have to take cash out for expenses.

Tax free a no brainer.
 
mrichard said:
Luckily, I do not have any debt other than my apartment, which I should be able to settle in the next 3 years. My lending rate is 8.5%, so not too much worries there.

As for TFSA, I am only buying US, and some global ETFs. I already have a money in SA top 40, but not adding more.



My company is with retirment on-line (Sanlam is the fund administrators), I can choose my allocation percentage to some funds like Allan Gray Global balanced, Investec Global Balanced, Coronaion manged, IS FullVest and some others.
The fees are (as percentages of fund salary) for admin (0.15%), death benefit (1.3%), disability benefit & trauma (1.1%). And fees as % of fund value are: Investment consulting (0.15%), Sanlam investment admin fee (0.023 if assests), and Investment manager fees as per fact sheet of selected fund.

I might look into opening an RA elsewhere. I have an easy equities account for my TFSA, I see they have some RA options for Emperor Asset management or cannon asset mangers funds. Not too sure about these and the fees. Will have to do some research. The thing with the company provident fund is that they will do my taxes and my payslip gets adjusted accordingly, with an RA, it adds some manual tax submissions.

Maybe someone has a good suggestion for a DIY RA with low fees?
Click to expand...

My employer added my RA contributions to their PAYE tax calculations on my request.

10X or Sygnia Skeleton are good index options.
 
mrichard said:
death benefit (1.3%), disability benefit & trauma (1.1%)
Click to expand...

Check how much you are covered for in respect of death and disability. If your provident fund contributions are the minimum, that probably applies to your cover, too. You may need to bump up the disability cover, ie protect your greatest asset - your earning ability.
 
brianj74 said:
Just bear in mind the flexibility you lose with retirement products. You going to be in SA forever? Want to invest in soe's?
Yes there is a tax benefit in contributing to retirement products, but worth having some flexible investments also, and use the capital gains/ interest exemptions you have. No penalties if you have to take cash out for expenses.
.
Click to expand...
True, especially with the new rules regarding the SOE's. And I might not be in SA in 5 years, who knows.

supersunbird said:
My employer added my RA contributions to their PAYE tax calculations on my request.
10X or Sygnia Skeleton are good index options.
Click to expand...
Thanks will keep it in mind.

diapason said:
Check how much you are covered for in respect of death and disability. If your provident fund contributions are the minimum, that probably applies to your cover, too. You may need to bump up the disability cover, ie protect your greatest asset - your earning ability.
Click to expand...
My death and disable, group, trauma etc is fixed at like 2.8% or something, so whether I chose 10% contribution, or 27.5% the 2.8% stays fixed. I chose the lowest death cover option (Core -40% or something), because I have a separate life cover policy with old mutual, which also has disability cover etc.
 
the eskimo said:
I saw this research too, but given the low caps on the TFSA (even if they are adjusted for inflation each year), it doesn't make a huge difference.

The way I like to think about it is that I'm maxing out my TFSA with the tax saving from my Retirement contributions. Makes me feel like I'm getting the best of both worlds.

One other thing to remember is that when you retire, if you're in a Living annuity, you can set your draw-down rate for maximum tax benefit if you have other assets you could access (eg TFSA) until you get older and the tax benefits are greater.
Click to expand...
RA vs TFSA: sure, not a big difference really (other than the fact that your TFSA is not reg28 constrained). But TFSA vs normal ETF investing: huge tax saving as the years go by
 
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