Retirement annuities (RA’s) have unfortunately been abused by unscrupulous intermediaries and institutions alike for many years now. The significant benefits of a retirement annuity have never wavered though, and have in fact, improved materially in the last year. A tax payer can now deduct up to 27.5% of their total remuneration or taxable income in each tax year, if invested into an RA up to an annual cap of R350 000. Although this is a big number, it now also includes employer contributions.
The benefits that many clients may not be aware of is that you receive multiple tax whammies/benefits:
- Tax saving on collective contribution each year.
- Nil tax within the RA, for the life of the RA. So, no Income tax, CGT (Capital Gains Tax), etc.
- Retirement Funds fall outside your estate, so at death they will attract no Estate Duty. That’s another 20% savings!
- For clients that can invest MORE than R350 000 each year, there are even more tax benefits. According to section 10C of the Income Tax Act, any disallowed contributions (that didn’t qualify for a tax deduction within any tax year) can be carried over until the following year PLUS you can receive tax free lump sums and/or income once you have retired!
- Finally, for clients that fall within the highest tax brackets, it is important to note that lump sum tax at retirement is a maximum of 36% vs 39%, 41% and 45% marginal tax rate now.
Allan Gray recently conducted a study to quantify what a nil tax environment means over the expanse of time. The study found that if one were to invest two equal sums of money into the same fund, with one of those funds housed within an RA (tax-free environment), the RA would generate an extra 2% per annum in return for the client over 10 years, despite the underlying fund being identical. The cumulative effect of this over any length of time, is significant.
Professor Matthew Lester of the Davis Tax Committee has gone as far as to say that a Retirement Annuity remains the last true tax-haven in South Africa – and he should know!
We have now unpacked the advantages that RA’s offer clients, but what of the products of old, that still litter the landscape?
We continuously interact with new clients who have a plethora of RA’s in their portfolio. One must ask why there is ever more than one, when SARS cares only for the collective contribution that a client makes to an RA vehicle each year, and not the collective tally of RA’s. The answer can be found in the distinction between “Old Style” and “New Style” RA’s.
Old style RA’s were front end loaded with lots of commission, which was then rolled up in part on the back end of the investment in the form of administration costs. Very simply, what you thought you were paying and what you were paying, were very different. I think it best to show this by a recent experience with a client:
- Client A invested R700 000 into a life company RA in 2000 (Old Style).
- In 2014, the growth equated to 62% for the period – just 4.4% per annum.
- The total fees disclosed were 3.2%, of which 1.6% was for the fund management charge.
- The performance of the fund in question, over the period and after the annual fee of 1.6% had been paid, was 10.5%
- Client A’s actual performance was just 4.4%, with a further “administration fee” of 1.6% to be added.
- 5% less outstanding fee of 1.6% and performance (4.4%) leaves 4.5% unaccounted for!
But wait, there’s more!
Unfortunately, the story does not end there. Client A was then advised to move this RA into a new RA at the same institution in October 2014, with the maturity date set for 2022:
- Fees now disclosed to the client at 4.6% per annum – a tad more transparent than the first one, but extortionately high none the less!
- Client A then attempted, with the help of Harbour Wealth, to exercise his legal right to transfer his hard-earned savings to an improved solution.
- The existing institution quickly notified the client, that he would incur a penalty of R148 000.
- The current investment equated to R1 350 000, making the so called “penalty” 11% of his total investment.
- Realistic annual charges of 6.2% vs an annual ALL IN cost of 1.5% with Harbour.
The idea that someone should be penalised on their own investment for exercising their right is preposterous and should be called what it is: “The recovering of undisclosed fees and commissions”. The burning question then must be, how much in the way of growth has Client A lost over the last 17 years, along with thousands of other investors?
The ability to reduce one’s break-even point (fees) in any business by such a margin, is non-negotiable in my opinion. We are essentially offering someone the ability to improve their car’s fuel consumption by up to 60%, without cost. The cumulative savings of this over time, whether fees or fuel, can be the difference between retiring comfortably and not.
South Africa has one of the most developed and impressive finance sectors in the world. The South African government has made some very meaningful amendments to rules and regulations, specific to the investment/ retirement landscape, which are designed to materially improve the position of the consumer. These changes have empowered consumers to be able to transfer and consolidate (if more than one) their retirement annuities into one RA at any institution of their choice. Further to this, no new initial fees or commissions can be charged on transfer.
The above option, coupled with one of Harbour Wealth’s founding principles; the providing of premium solutions and service at the most competitive price, means that clients’ retirement nest eggs can be immensely improved, by making more efficient, what is already in place.
If you would like to discuss this in more detail, or understand your personal implications, please contact your Wealth Planner.