Author: Pat Blamire

Financial planning gives you the freedom to dream

In a recent financial life planning meeting with a new client, I chatted with him about budgeting for overseas trips. He voiced his concerns about being able to afford expensive overseas trip once his salary comes to an end; he thought that, once he transitioned into retirement, he would be much more frugal when spending money.

I reminded him that this is the reason why the financial planning process is so important. While we plan for our retired clients to draw an income on a monthly basis from the monies that they have built up during their lifetime, we also plan separately for their holidays and other lump sum expenses. The planning process is critical to give them the confidence that they are not recklessly spending their retirement savings, and putting their retirement plan in jeopardy.

Don’t be frugal with living

I recalled the wisdom drawn from another client couple. They had been married for over 40 years, did not have children, and had sufficient monies to last their expected lifetime, plus some surplus.

I asked them what the point was in living a frugal life, just to leave money to nephews and nieces; I encouraged them rather to enjoy their savings themselves. I planned for two overseas trips in their budget, and urged them to consider where they would like to go.

A week later, a very excited Thomas phoned me to say that they would like to go on a cruise in the Mediterranean: was I absolutely sure that they could afford it? I reassured them, and they booked their cruise for three months hence. I had such pleasure in watching the excitement on their faces and in their voices, as the date for departure drew nearer. Thomas, prone to worrying, began to be concerned about how best to arrange his foreign exchange, and started watching the exchange rates. As the deadline got closer, Thomas and Felicity were uncertain about what wardrobe to pack as there was a certain number of dress-up dinners on the cruise, and they wanted to make sure they had suitable attire.

On their return we met to chat about their trip. I saw photographs of them sitting at the Captain’s table, beautifully attired, and of the various destinations they had visited. Their next question? “Can we afford a second trip?” I assured them they could, and the planning and excitement started all over again: where to go, which cruise line to choose, and so on.

Felicity is no longer with us, but I am so glad that she and John took these trips and that they had such fun in planning them. Whilst Thomas misses Felicity terribly, he at least has the memories of these fun times they had.

Article shared by Pat Blamire CFP® and Retirement Specialist at Chartered Wealth Solutions

When a loved one can no longer manage their financial affairs

When Sue’s planner noticed that Sue was becoming increasingly forgetful and tended to repeat herself in meetings, she realised that she would need to discuss this with Sue’s daughter, Elaine. Both Sue and Elaine had been clients at their financial planning company for some time.

‘How will I break it to my mother that she has to be certified as mentally incapable of managing her own affairs?” was Elaine’s response. She was devastated and felt overwhelmed by the weight of it all. Where to start?

Elaine decided to take over the administration of her mother’s affairs as her other sisters do not live nearby. Her already busy life became even more busy. Managing her own affairs and that of her mother’s proved to be extremely stressful. Paying bills, organising and managing carers and drivers, arranging meals, booking and attending doctor visits became the norm.

Elaine also had to take responsibility for Sue’s investment portfolio in addition to her own. Her planner encouraged her to consider handing the administration of Sue’s matters over to a professional administrator and made the necessary introductions. Elaine was reluctant at first, feeling that she was somehow letting her mother down; however, following her first meeting with the administrators, she realised that it would be in everyone’s best interest to engage their services.

Since then Sue has been moved to a retirement facility. Sadly, but not wholly unexpectedly, her mental state has deteriorated, so she requires full-time carers. Elaine takes comfort in the additional support offered by the administrator.

Sue is very fortunate in having a daughter nearby who is able to come to her aid. This is not always the case and having a conversation with your planner sooner rather than later is a critical part of your financial plan.

Prepare before the crisis

Penny is a client who has taken it on herself to look after her disabled mother’s affairs. “This handover of responsibility was organic, but I think, if personalities permit, it would be better to discuss these things with ageing parents before the necessity arises. Once there is a crisis, emotions run high, and you don’t know if the person will be in a fit mental or physical state to make such decisions.”

Perhaps open the discussion in this way: “As you are getting older, the possibility exists that you could have a stroke and not be able to talk or manage your affairs. It may be a good idea to sign a Power of Attorney together. Then, should the need arise, that would enable me to pay your bills and get what you need, without you having to fret about it.”

Encourage your children to attend at least one or two planner meetings with you to discuss plans whilst you are still mentally healthy and alert. It is an onerous and traumatic process for all parties concerned. Says Penny, “Considering increasing longevity and older people’s seeming denial about their stage of life and what lies ahead, with hindsight, I would have raised the subject much earlier about what would happen when my parents got older. I think it would have been helpful to introduce the idea of possible reduced independence and what strategies should be adopted if that were to occur. Perhaps even trying to get them to agree to go to look at different options at that time, so that they could see what they thought might work form them.’

Why not have this discussion, difficult as it may be, with your financial planner, so that you are equipped with the necessary information well before you may need it.

Article by Christina Forman, Certified Financial Planner and Retirement Specialist at Chartered Wealth Solutions. Read the first article in the series from both Christina: Plan for when you can no longer plan and her client who shares the implications of being a parents’ tax consultant and having power of attorney.

Effects of the proposed wealth tax in South Africa

Wealth tax is a hotly debated topic, especially since South Africa’s taxpayers are already overburdened. So, the invitation from the Davis Tax Committee (DTC) for public submissions on the desirability and feasibility of such a tax has placed the issue squarely in the limelight once again.

The Government is understandably keen on this idea as it needs more revenue to fund the bloated civil service, sustain high levels of other wasteful (and often corrupt) spending, and avoid the policy reforms required to stimulate growth.

Globally, wealth taxes have steadily declined in recent decades. By 2010 wealth taxes only existed, on an ongoing basis, in three member countries of the Organisation of Economic Cooperation and Development (OECD). South Africa has a tiny tax base, and is heavily dependent on a small group of individuals and companies that pay around 60% of the personal and corporate income taxes collected each year. It is feared that imposing a wealth tax on this small group could encourage a flight of capital and skills which would further weaken the economy.

Leeching land-owners

The proposed forms of such a tax in South Africa may include a land tax, and an annual wealth tax. It is assumed that by a land tax is meant an annual tax on the value of land.

It is hoped that at least primary residences should be exempt from a land tax. This would be in line with the way primary residences are treated differently from other fixed property for purposes of Capital Gains Tax (CGT). The justification for such an exemption is rooted in the fact that private ownership of residential property is an enabler for wealth creation, something which is desperately needed in South Africa.

There is the question of what other land should be excluded? Normal exceptions of land for recreational, educational, religious and charitable purposes, should be considered. Agricultural land should also be considered in order to avoid a further burden on already thin profit margins. Famers in some areas, for example, the Karoo, are notably asset rich and cash poor. An annual tax on land will place them in an even more serious cash squeeze.

If an annual land tax is levied on rented residential property, this sector will experience upward pressure as landlords will pass such a land tax on to the tenant, which will increase pressure on already stretched middle class citizens.

If there is to be a threshold value on such property, what should this threshold be? There is the possibility that an extremely wealth person with several pieces of land valued at below the threshold will effectively escape the tax.

Many elderly people hold onto their family homes. These homes can have quite a high value due to market movement, but their elderly occupants can be quite cash poor. This reality is recognised by many local authorities with special discounts on municipal rates for the elderly. If such a tax were levied, it would force elderly people of out of their homes. In addition, quality accommodation in retirement villages has increased by far more than the average increase in property values. Imposing this tax with too low a threshold will prejudice this already financially vulnerable sector of the population.

Are you one of the few?

The complexities of an annual wealth tax are daunting. To qualify as a tax on wealth, the net worth of the taxpayer will have to be determined on an annual basis. This will become an enforcement nightmare from a SARS point of view.

A further question is at what net worth does a person qualify as wealthy? This question has different answers depending on the life stage and circumstances of the individual. A 35 year old with R15m may be regarded as wealthy. However if the 35 year old is disabled, this is not a large amount of money. At age 65, upon retirement, if the R15m is the sole source from which income must be produced, it is similarly not a large amount of money. If an annual inflation-linked income of R850,000 per annum is being drawn, it is expected to last less than 25 years.

Very few developing countries have an annual tax on wealth. Developing countries, by their nature, need foreign direct investment to grow and develop their economies. They need to be attractive to investors to bring that desired level of foreign investment to grow and develop their economies. Extra taxes are always a deterrent to capital inflows.

Currently in South Africa, taxpayers with a taxable income in excess of R1m make up only 3.5% of the taxpayers, while contributing 38.5% of the income tax revenue. Ultimately, South Africa, like all developing countries, needs more growth and not more taxes.

The words of Winston Churchill are a sober reminder: “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

Minding your Ps and RAs

So, you have been saving faithfully towards your retirement. You are confident that you have enough stashed away in the various investment vehicles: RAs, Pension, Provident, Preservation, Unit Trusts … and now, you salary has come to an end. How do all of your investments come together to give you an income … and what are the tax implications? Certified Financial Planner, Pat Blamire, chats to Michael Avery on the Classic FM’s Classic Business programme, to help retirees get the most out of their retirement savings.

Click here to access the Classic Business radio discussion.

Demystifying tax implications of retirement funds

And drawing an income one day …

Whilst we are still working and earning a monthly income, we put away money towards our retirement. This is so that, one day, we no longer have to work and can start drawing an income from our retirement savings. That is the plan, but I find that many of my clients are confused regarding how their different investments come together at retirement in order to provide them with this income.

Minding your Ps and RAs

The main retirement savings vehicles are Pension and Provident Funds, and Retirement Annuities. The main difference between these different vehicles is that the former are employer provided funds, whereas the latter are typically used by self-employed individuals, or those people who want to increase their retirement savings.

In addition to these retirement savings vehicles there are also discretionary investments such as unit trusts, shares, tax-free savings accounts, properties, which supplement your retirement savings.

In terms of the Income Tax you are allowed to contribute up to 27.5% of your income towards retirement savings vehicles (Pension and Provident Funds, and Retirement Annuities), and to obtain tax relief on these contributions. You do not receive any tax relief on contributions made to your discretionary investments.

When you reach retirement and wish to retire from your retirement fund investments, there are certain tax concessions that you are entitled to. For Pension Funds and Retirement Annuities you are entitled to take, in Cash, up to one-third of these savings. The first R500,000 of this Cash amount is tax-free, and the balance is taxed according to the following tax table:

  • R500,001 – R700,000 @ 18%
  • R700,001 – R1,050,000 @ 27%
  • Amounts in excess of R1,050,001 @ 36%

The balance of two-thirds needs to be invested in an annuity (pension), which will pay you an income in retirement. As you were entitled to claim your contribution towards these funds as a tax deduction in the build up to retirement, when you start drawing an income from your annuity (pension), this income is taxable in your hands according to the South African Revenue Service published tax tables.

The rules for Provident Fund members are slightly different. Previously they were entitled to cash in their full Provident Fund savings, which amount would be subject to the tax tables mentioned above (first R500,000 tax free, etc.).

However legislation changed on 1 March 2016 whereby, going forward, members of Provident Funds would be subject to the same rules as those members on Pension Funds and Retirement Annuities, whereby they could only take one-third of the value of their fund in Cash, and the balance of two-thirds must be used to provide them with an annuity (pension) in retirement. There are certain exemptions to this requirement:

  • Anyone over the age of 55 on 1 March 2016, who was a member of a Provident Fund, would not be subject to these new regulations
  • In addition, if the fund balance of a member’s Provident Fund is less than R247,500, they will not be forced to buy an annuity with two-thirds of their Provident Fund savings.

In addition to your retirement fund savings, it is important that you also have discretionary savings which can be used to top up your monthly annuity (pension), and to pay for lump sum expenses such as holidays and new vehicles.

The plus of unit trusts

With a unit trust it is a simple matter to draw additional income or lump sums. Units in the unit trust can be sold for this purpose. It is a little more difficult to draw monthly income from a share portfolio as shares normally need to be sold in order to do this. With a property that is rented out, you will receive the rental income on a monthly basis. Where a problem may arise is when you do not have a tenant for your property, or the tenant refuses to pay and you struggle to evict them.

A Certified Financial Planner can assist you to navigate through these various decisions, and advise you on how your retirement savings should be structured, so as to take advantage of any tax concessions you may be entitled to, and ensure that you will have sufficient income in retirement.

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