Latest / Strictly Business / It's My Money with Ruan Breed

Transcript

It's My Money with Ruan Breed · Strictly Business

• 0:00
  You're listening to Strictly Business Podcast with Lindsay Williams.
• 0:05
  This edition of It's My Money is brought to you by Brenthurst Wealth, your partner
• 0:09
  for global wealth creation.
• 0:11
  Welcome to It's My Money.
• 0:12
  It's My Money is brought to you by Brenthurst Wealth, South Africa's
• 0:15
  multi-award winning boutique wealth manager.
• 0:17
  I received a piece of work that says the following, income tax strategies in
• 0:22
  retirement structuring.
• 0:24
  Ruan Briat from Brent House Wealth is with me.
• 0:26
  Now Ruan, there's three things I want to tell you, or a couple of things I want to
• 0:29
  ask you, and one thing I want to tell you.
• 0:31
  What I want to tell you is that this is the sort of subject that you've got to go
• 0:36
  slowly with, with me anyway, because
• 0:38
  it sounds complicated just from the headline.
• 0:42
  The second thing is, is a question, is this a problem?
• 0:46
  Or second question, is it a problem that investors make it a problem?
• 0:51
  Which of the two?
• 0:52
  Hi, yes, Lindsay, thanks for having me.
• 0:55
  Yes, Andrew, 100% right.
• 0:56
  This is a very technical or could become a very technical topic to unpack.
• 1:02
  Yes, I don't think it's a problem.
• 1:04
  Instead, I would regard the whole Section 10c strategy more as a valuable estate
• 1:11
  planning tool, of course, if used correctly at that as well.
• 1:17
  So obviously, there's, you know, these days, there's a lot of DIY.
• 1:22
  investors out there, people making use of, you know, we had the previous discussion
• 1:27
  of passives versus active.
• 1:28
  So taking out the middleman, the fund manager, and with the use of new IA
• 1:35
  tools these days, you know, the more you'll find that more and more people want
• 1:39
  to do investing themselves.
• 1:41
  But obviously investments, like I always say, there's more to investments than just
• 1:46
  the return figure on your
• 1:48
  portfolio, which is what everyone obviously always looks at.
• 1:51
  I'm not saying that's not important, but I think there's other aspects of
• 1:56
  investments, especially when you look
• 1:58
  at high net worth clients, that comes into play, such as tax planning, estate
• 2:03
  planning, succession planning, all
• 2:05
  those kind of things, than just focusing on performances and fees.
• 2:10
  And I think this is where something like this comes in and where the value of a
• 2:15
  professional person is
• 2:17
  really seen or becomes visible.
• 2:19
  Yeah, this is exactly where a financial advisor comes in.
• 2:22
  And the reason I mentioned problem, let me just track back a bit here, is because the
• 2:25
  beginning of your article says one of the most misunderstood corners of
• 2:28
  SA's retirement legislation is what happens when an investor contributes more
• 2:33
  to a retirement fund than they are allowed to.
• 2:36
  That's where you go on to say where the problem starts.
• 2:40
  So there is obviously a problem there.
• 2:41
  And you've obviously come across problems with clients not understanding that.
• 2:45
  So what's the beginning of the problem?
• 2:47
  Start there, if you would.
• 2:49
  Yes, and I think that's pretty basic, Lindsay, and for purpose of this
• 2:52
  discussion is that there's obviously certain rules and regulations
• 2:55
  in terms of the Pension Funds Act and including underneath that umbrella is, you
• 3:00
  know, for something like a retirement annuity,
• 3:03
  which is just one of the vehicles.
• 3:05
  I think that's important to clarify.
• 3:07
  It's just one of the vehicles that an individual in South Africa in terms of our
• 3:12
  tax law can use
• 3:14
  to build up their portfolio over time for retirement.
• 3:18
  And like I say, once again, there's more to the discussion than just returns.
• 3:23
  I think that's where tax planning and estate planning especially becomes quite
• 3:27
  important.
• 3:29
  So by making use of the retirement annuity, you not only invest assets
• 3:36
  in a tax-efficient structure whereby there's no tax on the growth of any of
• 3:41
  these funds, but also you
• 3:43
  take these funds out of your dutiful estate as a South African investor.
• 3:48
  be paying 20 to 25 percent estate duty on the value of your assets when you pass
• 3:53
  away and i
• 3:55
  think this is this is where a retirement annuity becomes valuable and also also
• 3:59
  perhaps over contribution in terms
• 4:02
  of your retirement annuity so the the back to your question is that the law or
• 4:06
  retirement planning rules state that you
• 4:08
  can contribute up to 430 000 rand per annum to a retirement annuity and i think
• 4:14
  that's where the misconception
• 4:15
  lies is that You could contribute any amount you like to a retirement annuity in
• 4:21
  a given tax year up
• 4:22
  to, there's no limit.
• 4:24
  The only limit on the R430,000 is the limit that you can get in terms of your
• 4:30
  tax benefit in that
• 4:31
  year of assessment.
• 4:33
  Now, any contribution over and above your...
• 4:37
  Qualified tax deduction for that year will remain in your retirement annuity as an
• 4:43
  over-contribution.
• 4:45
  So that could be used for subsequent year's tax returns.
• 4:50
  Or if you could, for example, make a contribution every single year and you
• 4:55
  carry that excess
• 4:57
  contribution of the previous year over, that could be used in retirement to offset
• 5:02
  retirement income from the
• 5:04
  resultant living annuity.
• 5:06
  the income in terms of tax purposes.
• 5:08
  So when people see the 430,000, they think that's it, 430,000, I've reached my limit,
• 5:13
  I can't do any more.
• 5:14
  They've got that sum in their head.
• 5:16
  Like, for example, they might have the contribution to a TFSA sum in their head,
• 5:21
  which is true, you can't go above a
• 5:23
  certain amount when it comes to tax-free savings.
• 5:25
  But with this, in this case, the 430,000 is just a number, you can go above it.
• 5:33
  That's 100% right.
• 5:36
  Every structure that you could bring into your portfolio works according to certain
• 5:41
  rules and regulations, whether it's
• 5:42
  contribution limits, the tax management of the portfolio or the structure, etc.
• 5:49
  So this is where it really differs.
• 5:51
  So a tax-free savings structure, for example, plays a completely different role
• 5:59
  in both phases where you first accumulate funds and then in retirement where you use
• 6:04
  those funds.
• 6:05
  So every single one of those structures will be utilized differently in your
• 6:12
  portfolio.
• 6:13
  The one that's got set rules in terms of contributions and the other one that's got
• 6:19
  less so.
• 6:20
  But there's a misconception in that the amount that you can contribute towards an
• 6:24
  RA and what the benefits
• 6:27
  is that you will get by doing so.
• 6:30
  In my introduction, I said you'd have to go really slowly with me because it could
• 6:33
  become a very complex subject.
• 6:35
  And I always, when I'm faced with a complex subject and I'm interviewing one
• 6:39
  of you or your fellow experts, I
• 6:42
  ask for an example.
• 6:43
  Do you have an example of how it works?
• 6:47
  Yes, I do have an example that I could share, Lindsay.
• 6:51
  It's also written in the article.
• 6:54
  But for clarity purposes, for example.
• 6:58
  scenario I've used is that, for example, John retires from a pension fund and he
• 7:04
  likes to take a lump sum of two
• 7:05
  and a half million rand.
• 7:07
  Now, normally, when an investor retires, you've got a lump sum,
• 7:14
  a tax-free lump sum that you could take at the amount of 550,000 rand.
• 7:21
  And that's your lifetime with a lump sum amount.
• 7:24
  So, if you've made any prior lump sum withdrawals that will be taken into
• 7:28
  consideration to calculate your
• 7:30
  550,000 tax free lump sum so in this case john retires with a two and a half million
• 7:36
  rand
• 7:37
  uh lump somebody wants to take and the balance of the benefit is invested in a
• 7:42
  living annuity so the
• 7:44
  john has about four million rand of previously there's a large contribution
• 7:48
  still so in terms of the
• 7:51
  retirement fund lump sum there there will be uh Of the 4 million rand
• 7:57
  disallowed contributions, 2.5 million rand, the lump sum that he takes now, will
• 8:04
  be
• 8:04
  deducted from his previously disallowed contributions.
• 8:08
  So at the end of the day, he will still have a remaining balance of 1.5 million
• 8:13
  rand in disallowed contributions,
• 8:15
  of which he can then offset his income in subsequent years to the value of 1.5
• 8:20
  million rand.
• 8:21
  also note importantly that This will be deducted against or offset against gross
• 8:27
  income and not
• 8:28
  net income, which means that you will use that benefit very quicker.
• 8:33
  Now, another important caveat to note here is that in a case where you take a lump
• 8:39
  sum on
• 8:40
  retirement, in this case, John, that takes 2.5 million Rand, and you've got excess
• 8:46
  contributions
• 8:47
  where I mentioned that John has 4 million Rand in excess contributions.
• 8:51
  you will...
• 8:52
  first make use of your excess contributions and you will sort of forfeit
• 8:59
  your
• 8:59
  550,000 Rand tax-free lump sum.
• 9:03
  So the one and a half million Rand lump sum or disallowed contributions, sorry,
• 9:09
  disallowed
• 9:10
  contributions that John still has will now be offset in subsequent years in terms of
• 9:15
  income.
• 9:15
  So for example, if John earns annuity income of 900,000 Rand, In the
• 9:22
  first year of income, the full R900,000 will be exempted via 10C exemptions.
• 9:29
  So there will be zero taxable annuity income.
• 9:33
  You will have a remaining disallowed contribution of R600,000.
• 9:37
  So in the following year, his taxable annuity income would be R300,000.
• 9:43
  So what Section 10C essentially does then, any surplus contributions
• 9:50
  immediately become tax efficient.
• 9:52
  That's the why that we do it.
• 9:54
  But what sort of person should be doing it?
• 9:57
  That's a very good question.
• 9:58
  That's something we obviously get also quite often.
• 10:02
  The Section 10C, if you think about it, the reason or the value behind it lies in
• 10:08
  the
• 10:09
  tax management of the funds and how it falls into or out of your estate.
• 10:13
  So normally for clients with high level of allocation of their portfolio to
• 10:19
  discretionary funds, such as
• 10:20
  cash and share portfolios, etc.
• 10:23
  This is a very valuable tool to make use of, especially considering efficient
• 10:28
  succession planning.
• 10:30
  Remember that the value of your retirement funds fall outside of your estate and you
• 10:34
  are able to nominate beneficiaries on those funds.
• 10:36
  So those funds become immediately available for your beneficiaries.
• 10:41
  And.
• 10:42
  Also, in the case where you, for argument's sake, let's say you pass away
• 10:46
  with excess contributions in your
• 10:49
  RA or in your living annuity still in place, that value of those remaining
• 10:55
  excess
• 10:56
  contributions will also fall outside of your estate should the beneficiary of your
• 11:01
  annuity decide to
• 11:02
  continue with the annuity.
• 11:04
  So, if the beneficiary continues with the annuity, the value of the excess
• 11:11
  contributions remain in place and falls outside of the estate of the investor.
• 11:15
  If the beneficiary decides to cash out the annuity, then the excess contributions
• 11:22
  will be
• 11:22
  included in the investor's estate that passed away.
• 11:26
  But normally for clients with high levels of cash or discretionary assets compared
• 11:32
  to the retirement
• 11:33
  funds, this is a very valuable tool.
• 11:35
  We see this often for business owners that sell their businesses or people earning
• 11:42
  high salaries
• 11:43
  and it's got a large exposure to discretionary savings as opposed to
• 11:47
  retirement savings.
• 11:49
  I think this whole chat that we've just had is a great illustration of the fact
• 11:53
  that it's not just about making money.
• 11:55
  And you said that at the beginning.
• 11:56
  You can make a lot of money, but if you use that money incorrectly within a
• 12:01
  portfolio, then you
• 12:03
  lose.
• 12:04
  a lot of the benefits through being tax inefficient, if you like.
• 12:08
  And this is another example of why you need a financial advisor to structure your
• 12:13
  portfolio accordingly.
• 12:15
  Lots of people can make money.
• 12:16
  Not a lot of people can make that money work for them super efficiently.
• 12:20
  I think that's the message here.
• 12:22
  Yes, most definitely, Lindsay.
• 12:24
  And I think that's what I mentioned and referred to earlier is that you could
• 12:28
  focus on your returns and you could be lucky by generating
• 12:31
  proper returns.
• 12:32
  above whatever benchmark you would like to measure it against.
• 12:36
  But if your portfolio is not structured directly, you will leak a very large part
• 12:42
  of your portfolio in
• 12:43
  taxes back to the receiver of income.
• 12:47
  So if you are not very clever and astute as to how you structure your portfolio,
• 12:52
  your returns might all be
• 12:54
  in a certain sense in vain.
• 12:57
  Very good.
• 12:58
  Well explained.
• 12:58
  Even I understood that.
• 12:59
  Thank you very much for your time.
• 13:01
  Ruan Breed is a wealth manager at Brenthurst Wealth Stellenbosch.
• 13:05
  If you need to contact him about any of the sort of technical issues he's just
• 13:11
  well explained, you can do so
• 13:12
  by going to Ruan at brenthurstwealth.co.za.
• 13:16
  Ruan, thanks very much for your time again.
• 13:18
  And that was It's My Money.
• 13:20
  It's My Money was brought to you by Brenthurst Wealth, an award-winning
• 13:23
  boutique wealth management company.