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Distrust can come at a high price

Let a financial planner examine your financial structure – and win

By Elmie de Jager

24/2/2024

My heart literally aches every time there’s news about a shady financial advisor. In the comments, you often read people saying, “See, they’re all a bunch of crooks… that’s why I’d rather keep my money safe in the bank.”

If you’re honest with yourself, you must acknowledge that this approach is a bit like saying ‘all planes crash at some point’ every time you hear about an aviation tragedy.

It’s simply not a fair statement, but on the other hand, we understand where it comes from.

However, the tragedy is that this distrust in the industry as a whole is going to cost you dearly because competent financial planners can add substantial value to a family’s prosperity.

Allow me to illustrate with a real-life example how slightly different thinking about your financial affairs can make a significant positive difference.

In the case study, the client will build a reasonable estate if he lives another 25 years. After a discussion about the pros and cons of a trust, the client decided against a trust.

For many people, that would have been the end of the conversation, and they would simply continue on their current path. However, there’s an alternative route. Again, the client can weigh the pros and cons and decide for themselves, but the benefits are obvious, especially if you’re not keen on continuing to fill the state coffers.

Here are the details:

The client receives a taxable lifetime pension of R852 255 per year, which ceases at his death. He has a primary residence worth R4.2 million and discretionary investments of an additional R4.2 million.

His post-tax income from the pension fund is currently sufficient for him to maintain his lifestyle, and thus the value of his property and investments can continue to grow over time.

Both assets are part of his estate and will be subject to estate and capital gains tax upon his death.

Assuming he achieves inflation plus 5% growth on his discretionary investments (in line with long-term returns on balanced funds) and inflation plus 1% return on his property, the graph below shows how his capital accumulation will look.

The client is expected to ultimately have an estate of approximately R71 million in 25 years; about R18.6 million in today’s terms.

If we indulge in wishful thinking and assume the current R3.5 million estate duty exemption also grows annually with inflation, it still means that the client’s children will have to pay SA Revenue Service (SARS) a little over R3 million (in today’s terms).

By making the maximum tax-deductible contribution to a retirement annuity from his discretionary funds annually (the blue section in the above graph), the client not only gains the income tax deduction and possibly falls into a lower tax bracket, but the growth on that money is also now exempt from capital gains and income tax and is excluded from estate duty.

In just the first year alone, the income tax saving amounts to about R 90,000 – and it grows annually. Our recommendation to him would probably be to take advantage of the gift from SARS and go on holiday for free, but for dramatic effect, I still want to illustrate the impact, if the client reinvests this tax windfall back into his investments.

Added to this is the dark orange part on the bottom graph (which partially replaces the blue part on the top graph) and the light orange part, illustrating his tax cheques received from SARS.

In addition to ending up with a total estate of R88 million compared to R71 million, only R27.2 million of it is subject to estate duty instead of the full R71 million.

The difference in estate duty alone will thus be in the order of R2.3 million (in today’s terms).

If the client has indeed saved the tax he received back from SARS and not spent it on holidays, his children would inherit an additional R16.8 million (or R4.4 million in today’s terms).

Keep in mind that this structure also entails significant capital gains tax benefits, but that is beyond the scope of this article.

Note that the above client hasn’t fundamentally changed his life, only his financial structure, but the outcome is equivalent to the benefits of a lifetime of toil and sweat.

Just to come back to the “I’d rather keep everything in the bank” comment.

Even if I assume a gross simple interest rate of 9% in the “safe” investment, one must bear in mind that this return is 100% taxable.

So, if the above client were to follow this strategy, the additional interest would land him in a higher income tax bracket and his net return from the cash or money market investment would be in the order of 5.31%, bringing his total assets over 25 years to R35.5 million instead of potentially R88 million.

R52.5 million (or R13.7 million in today’s terms) is a very expensive price to pay for distrust.

Finally: As with any financial decision, there are a few things to keep in mind before implementing such planning. Unfortunately, the length of this article does not allow for all permutations, benefits, and potential downsides to be highlighted.

It’s important to get expert advice before making any changes to your planning.

Elmie de Jager is a certified financial planner at Woodland Wealth. Contact her at info@woodlandwealth.co.za.

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.

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