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It's My Money with Kristin Putter · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  This edition of It's My Money is brought to you by Brenthurst Wealth, your partner
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  for global wealth creation.
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  Welcome to It's My Money.
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  It's My Money is brought to you by Brenthurst Wealth, South Africa's
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  multi-award winning boutique wealth manager.
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  Here's a headline that caught my eye.
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  It says the following.
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  Are you losing 30,000 a year in unnecessary tax?
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  This was an article written by Kristen Putter, a paraplanner.
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  at Brenthurst Wealth in Pretoria and it's a complicated subject because
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  Kristen it involves two different strategies in your portfolio doesn't it
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  one involves unit trust and the other
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  one involves a retirement annuity but one is good and one is bad and quite honestly
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  I'm a little bit confused already so over to you please what what was the purpose of
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  your article first of all
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  Yeah, so I can start off.
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  by saying that it's not an either or, one is good or one is bad.
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  It depends entirely on your situation.
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  So both can add benefits to your portfolio.
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  It just depends on what your goals are, which product you would use.
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  So on the one hand, you have the retirement annuity, which is a bit more
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  limited,
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  but it gives you tax advantages.
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  And on the other side, you have the unit trusts, we have flexibility,
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  but it does not offer any tax advantages.
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  So it depends entirely on your profile.
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  Okay, it depends on your profile, your situation, I suppose, your goals as well,
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  your aspirations, how old you are, how much money you've got.
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  But what's the general principle?
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  You say that a unit trust gives you maximum control.
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  What do you mean by that?
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  So with a unit trust, If I can relate it.
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  it can be like a bank account.
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  So you can do what you want with the funds.
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  You can put in whenever you want, how much you want.
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  You can withdraw whenever you want.
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  There's obviously a bit of a time delay with withdrawals with relation to a bank
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  account,
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  but it's still, it's the same fundamentals.
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  You can choose whichever funds, there's no limits on where you can invest.
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  So that's with the full control.
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  You can have a say in whatever goes.
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  Okay, and what sort of person would go for the full control option?
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  You mentioned the sort of situation where your finances are uncertain, you say.
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  So you mean if somebody doesn't really know how much is coming in each month,
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  maybe it's an entrepreneur,
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  a small business owner, something like that, they need the flexibility of the
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  unit trust.
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  Is that right?
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  Yes, so with the flexibility and with the investment period, those are,
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  if you have a goal, you want to buy a car in about five years' time.
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  Then the unit trust will offer you more growth than a money market account would.
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  So with the retirement annuity being locked away until 55,
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  then the unit trust would be your better option because you can access the funds
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  whenever.
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  So if you want to withdraw them in five years time, then you can do it.
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  If you want to put savings away,
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  most people use this type of account for their children's education because it's
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  also in a few
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  years time, there's a lot of time for growth and it's flexible.
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  You can draw the money as you go.
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  Okay, moving on to something that's not quite as flexible.
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  Again, you've mentioned it, but please tell us a little bit more about the
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  retirement annuity,
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  the different rules applying to that your annuity is locked away until you reach 55.
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  As you've said, and if you're 35, you think to yourself, well, that's not what I
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  want.
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  But it does work for some people, apparently.
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  Yeah, so the most beneficial aspect of the retirement annuity is the tax
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  deduction.
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  So that's mostly what...
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  what clients use the retirement annuity for is it reduces your income when you do
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  your tax return.
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  So it might not be an immediate, immediate advantage.
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  It's every year when you submit your tax return,
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  then your total contribution subject to the limitations gets deducted from your
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  income
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  before they apply your tax.
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  So that's the most useful advantage.
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  And then The other limitation is the Regulation 28,
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  which limits which sector and which asset class you can invest in.
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  So the government applies this Regulation 28 to ensure that you don't, for example,
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  put all of your money in equity funds.
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  And then when you get to retirement, you've lost all of your money.
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  So the regulation is important.
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  place so you save your money against volatility and then also the other
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  limitation is the age 55 so there are limited options before you retire like
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  Immigration, for example, where you can access your funds before that time.
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  But it's most likely you can only access on
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  55. And then also after 55, you don't get access to the full amount.
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  You can only cash out one third.
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  So that's also.
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  So there's a lot of rules, but there's the big tax advantage.
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  Yeah.
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  It's starting to get complicated now.
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  But what we really want to know, to a simpleton like me that is, Kristen,
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  but what we really want to know is what the 30,000 saving or where the 30,000
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  saving comes from.
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  Because that was your headline and that's what draws people in.
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  They need to know how they can save that 30,000 or if they're paying 30,000 too
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  much at the moment.
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  There's some figures involved with this.
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  So you've got to go very slowly with me, please.
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  Okay,
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  so the 30,000 savings comes in with your contributions towards a retirement
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  annuity.
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  So every contribution you make subject to the limitation of
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  27.5% of your taxable income per annum.
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  So every contribution limited to that limitation gets deducted from your
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  income.
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  So if you contribute...
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  $100,000, then
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  $100,000 gets deducted from your income at the end of the year.
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  So let's say you did not make any contributions and you were taxed on the
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  full
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  $100,000, then you would have paid
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  $30,000 tax on a 30% marginal rate.
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  So that's where the 30,000 savings come in.
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  So if you did not make the contribution, you would have paid 30,000 rand tax on
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  100,000 income.
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  But if you do the 100,000 contribution, after that deduction from your gross
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  income,
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  you get the 30,000 savings.
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  So if you're earning a reasonable amount or a decent amount, you're paying tax at
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  higher marginal rates.
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  You get an immediate relief from this.
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  Is that what you're saying as well?
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  Yes, immediate as with reference to when you do your tax return.
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  So it's not immediate like as and when you make the contribution, but at the end of
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  the year.
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  OK, we've got to look forward now.
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  What does this look like?
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  I mean, we always talk about compounding, the power of compounding when we have
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  these podcasts.
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  So we have to look forward.
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  Let's have a look at what this might mean to you over a 10 year period, please,
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  Kristen.
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  Yes, so if I can compare it to the unit trust,
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  let's say the unit trust earns interest income.
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  So that interest income, as it accumulates, you get taxed on it.
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  So in relation with the retirement annuity,
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  there's no interest tax or capital gain tax applicable on the retirement annuity.
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  So.
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  all of the growth that you earn throughout the entire life of the retirement annuity
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  is tax-free,
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  where in the unit trust, it gets taxed as and when.
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  So that's also the saving.
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  Right.
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  And of course, just like you said in your introduction, it's not a question of one
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  or the other.
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  It's all to do with your personal circumstances.
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  And as I said, how old you are, how much you earn, what your aspirations and goals
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  are.
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  So we've got to go through what you do.
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  I mean, the first thing you do, of course, is sit down with a paraplanner or with an
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  investment advisor and tell them your
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  situation and they'll guide you.
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  But what would you say in general terms, who should do one thing and who should do
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  another, please?
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  Well, we generally advise to set up your emergency fund as a first point
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  when starting to save.
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  So the unit trust can be an emergency fund.
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  in those aspects.
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  And emergency funds are usually the equivalent of six months income.
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  So if you have already the emergency fund and there's no other funds that you need
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  access to in the near
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  future, then you can look at the retirement annuity.
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  Or in another case, if you have a specific goal for the funds, like a vehicle in five
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  years,
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  then you would go to the unit trust.
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  But in most cases, we use both products.
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  for one client to take advantage of both characteristics.
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  It really sounds something that, first of all, is worthwhile looking into, and
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  secondly, worthwhile looking into with your advisor,
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  because that sort of money to be saved is definitely something that should be looked
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  at, I say.
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  Kristen, thank you very much for your time.
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  It was a great explanation.
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  Kristen Putter is a paraplanner at Brenthurst Wealth in Pretoria, and that
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  was It's My Money.
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  It's My Money was brought to you by Brenthurst Wealth, an award-winning
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  boutique wealth management company.