Findings from the 2016 Sanlam BENCHMARK Survey show that many retirees’ income – even in the affluent market – is not keeping pace with inflation, leading to a reduction in the buying power of their post-retirement incomes. This points to the necessity of supplementing the savings you have in your employer’s pension and/or provident fund. Supplementing your retirement savings with a retirement annuity A retirement annuity, or RA, is an ideal vehicle for this purpose. Investors can receive tax benefits by investing up to 27.5% of the higher of their taxable income or remuneration into retirement savings products (RAs, pension and/or provident funds). The tax-deductible amount is capped at R350 000 per year. Re-investing the tax saving can significantly increase the final value of your investment. In addition, while saving in an RA, you don’t pay tax on any interest or dividends, and no capital gains tax is applicable on the growth in the investment. Depending on the investment platform, investors can select from a wide choice of underlying investments in their RA, including risk-profiled investment funds, local or foreign funds, actively managed or passive index-tracking funds, single manager or multi-manager funds, as well as an individual share portfolio or exchange traded funds. The maximum exposure to asset classes, however, is governed by Regulation 28 of the Pension Funds Act. Current limits include a 75% maximum exposure to equities, 25% to property and 25% to offshore investments, although an extra 5% can be invested in Africa. Investors have until the end of February each year to take advantage of the tax benefits for that particular tax year, by adding a lump sum to their RAs. Tax-free Savings Accounts – a vital part of any investment portfolio The benefits of Tax-free Savings Accounts (TFSAs) are well-known by now – no tax on interest or dividends received, and no capital gains tax or tax on funds withdrawn. Making a TFSA work for you to your best advantage, and within the context of your overall investment portfolio, requires some consideration and professional financial advice in this regard is invaluable. It will take investors 15 years to reach the maximum lifetime contribution limit of R500 000 to their TFSA. While you can access the money at any time, any amount withdrawn will be regarded as a further contribution (towards your lifetime contribution limit) when re-invested in the TFSA. Given this negative impact of withdrawals on your contribution limit, your TFSA should be viewed as more of a long-term investment; there are other investment vehicles more suited to short-term savings or emergency funds. Other important considerations involve weighing up contributions into a TFSA versus a regular investment plan, as well as into a TFSA versus a retirement annuity. TFSA vs Investment Plan If an investor is currently investing, for example, R5 000 a month into a discretionary savings plan, it will make financial sense to split the investment, i.e. invest R2 500 into the discretionary savings plan and R2 500 into a tax-free savings plan in order to utilise the tax benefits of the TFSA. TFSA vs Retirement Annuity Weighing up contributions to a retirement annuity (RA) versus a tax-free savings account is a slightly more complex decision. Together with your adviser, you need to look at the advantages and disadvantages from a tax perspective. While for both options the growth within the product is free of dividends tax, income tax on interest and capital gains tax, only contributions into an RA are tax-deductible. The TFSA will, however, offer more flexibility in terms of access to money, whereas RA funds can only be accessed from age 55 upwards. Lump sum withdrawals from RAs are only tax free up to certain limits, while there is no tax when withdrawing from a TFSA. However, it needn’t necessarily be an ‘either/or’ choice. Using the two in combination can deliver superior results. Investing on behalf of your children Parents can also open tax-free savings plans for their children, i.e. a family of four, with two children, can save up to R120 000 tax free (in the 2016 tax year). From 1 March 2017, the limit increases to R33 000 per individual per year, therefore a family of four can invest up to R132 000 per year. This is an ideal way to save for a child’s education and can also help to cultivate a savings ethic from a young age. Note that when investing on behalf of your children or transferring an investment to them, donations tax of 20% of the amount donated is payable. Investors, however, have an annual donations tax exemption of R100 000. Investors are encouraged to consult with a qualified financial adviser to ensure their investment portfolio is in line with their personal circumstances and risk profile. To get a quote for a Retirement Annuity or Tax-Free savings account, please contact Kevin or Thato, email: invest@daberistic.com tel no: (011 658-1333) Written by: Roenica Tyson Source: Sanlam
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Robert Kiyosaki multimillioanire and author of "Rich Dad, poor dad" wrote this blog about The mistake millenial parents mistake regarding their children and finance. This is what he had to say; More and more there is an interesting trend: parents paying down the cost of their children’s debt. Whether it be student loans, home down payments, or living at home because of credit card debt, parents of millennials are footing the bill—or at least significantly helping pay down—for their kids’ big debt costs. On one level, I can understand this impulse. Parents naturally love their children and want to help them start life on the right foot. And the high levels of debt that most young people have, along with low salaries and poor job prospects, make it very tough for them to get ahead. But I believe that footing the bill for your kids actually hurts them more than it helps them. The pain of financial failure My first business sold nylon and Velcro surfer wallets. We worked out licensing deals with famous rock bands and put their logos on the wallets. The sold like hotcakes and the company grew very quickly. But I made a huge mistake. My attorney told me that I should patent my idea. When I heard that it would cost $10,000 to do so, I said no way. Soon another company came along and copied my idea, cutting into my market share. On top of that, I had a number of distributors who owed me money but were not paying. Soon my company was in dire straits and I decided to meet with my rich dad. What I hoped to get out of the meeting with rich dad and what I got were two very different things. My hope was that rich dad would show me a path forward to save my business—and maybe even to offer some financial support. Instead, rich dad looked over my financials, stared me in the eyes, and said, “Your company has terminal financial cancer. You have grossly mismanaged this business and it can’t be saved.” In my arrogance, I tried to convince him that he was wrong about my business, but deep down I knew he was right. Eventually I had to liquidate my business. In the process, I went $1 million in debt. The pain of this financial failure was very acute. Digging out of debt Soon after that, I met Kim. I didn’t think this beautiful woman would want to be with a guy whose business just failed and was $1 million in debt, but we fell in love and she stuck with me. Together, we worked hard to build a new business centered around financial education—at times living in our car or on friend’s couches to make ends meet. We both knew we didn’t want to simply go and get a good job. We wanted to build a company and we found our purpose in life. That clarity of vision allowed us to make the many sacrifices we needed in order to achieve our goal. Eventually, Kim and I paid of the $1 million in debt and built a successful business. Along the way we learned invaluable lessons not just about money but also about ourselves. The pain was necessary The easy path for rich dad would have been to placate me, sugar coat his assessment of my business, or even to give me a loan to see if I could turn it around. Any of those options would have done me a huge disservice. Ultimately, it was rich dad’s hard words—and the hard years that came after them—that led to my success later in life. I can confidently say that had it not been for the hard truth that rich dad gave me, I would not be where I am today. The financial pain was necessary for me, and it’s necessary for your kids. How to really help The easy way out for parents is to pay for their kids’ expenses and debt. The hard way forward is to watch them struggle financially while working with them to build their financial intelligence. Rather than foot the bill, I encourage all parents to invest in their children’s financial education. Don’t pay for the debt, but do take them to a seminar that can change their perspective on money and the world. Spend time rather than cash to go over their financial statements and coach them on how to make better financial decisions. And be there when they need a shoulder to cry on. Only by owning their own financial future will our children grow to prosper and thrive in a world where it is increasingly hard to financially survive. Where to start The good news is we have many resources to help you do this. Start with going over the new rules of money: Money is knowledge Learn how to use debt Learn how to control cash flow Prepare for bad times and you will only know good times The need for speed Learn the language of money Life is a team sport; choose your team carefully Since money is worth less and less, learn how to print your own From there, I encourage you to read and study Rich Dad Poor Dad, which has just been released in a new and updated edition, and take the time to play CASHFLOW together, which was created to put the rich dad principles into real world simulation. You can play online for free. Once these foundations of financial intelligence are in place, you can then begin advanced work with a coach, as well as attend specialized workshops and seminars. And best of all, you can formulate a plan to even invest together. Kim and I started the Rich Dad Company many years ago precisely because we want to see you and your kids enjoy the financial success that comes from the lessons handed down to us and learned along the way. Why not start today? To get get assistance for your financial planning for your whole family, please contact Kevin or Thato in our Invest Department, email invest@daberistic.com, tel (011)658-1333 Written by: Robert Kiyosaki Source: Richdad Tax free savings is an investment option if you are investing for the long term, or if you are already paying income or capital gains tax on your existing investments, you can invest in unit trusts via our tax-free investment account and benefit from tax savings on your investment return. It is also a useful product for estate planning purposes. How it works
To get a quote for a Tax free policy, please contact Kevin or Thato, email: invest@daberistic.com tel no: (011 658-1333) Source: SARS What is it?
Tax Free Investments were introduced as an incentive to encourage household savings. This incentive is available from 1 March 2015. How will it work? The tax free investments may only be provided by a licenced bank, long-term insurers, a manager of registered collective schemes (with certain exceptions), the National Government, a mutual bank and a co-operative bank. Service providers must be designated by the Minister in the Gazette. As per the current Regulation, only the above are designated. This is how it will work:
The end of the tax year is fast approaching – but there is still time to take advantage of some of the incentives the government has put in place to encourage savings. The introduction of the tax-free savings legislation last year has added an extra arrow to the quiver of tax-efficient options available to investors. Options are great, but having to choose often stops people from acting and can get in the way of our good intentions. If pressed to make a decision between a unit trust-based retirement annuity (RA) or a unit-trust based tax-free investment (TFI) product, which should you choose?
Begin with the end in mind At this time of the year maximising tax breaks is a common, top-of-mind goal. However, it is important to look at your portfolio holistically, either on your own or with the help of a good,independent financial adviser, to ensure your decisions fit in with the long-term plan. Let’s talk tax There has been much debate about the benefits of TFI products versus RAs. First, remember that both an RA account and a TFI savings product grow free of dividends tax, income tax on interest and capital gains tax. In our simple example1., because you are compounding all gains tax free, your investment value at the end of 30 years would end up roughly 45% higher than in a discretionary investment. The main difference between the two products is that an RA offers tax savings now, i.e. you pay less tax now because you make contributions with earnings on which you have not paid tax, but you will pay tax later, i.e. you defer paying tax. With TFI products, on the other hand, you use after-tax money to invest, but you pay no tax later; your withdrawals are completely tax free. So which offers the best deal tax-wise? Let’s consider the detail: Only 15% of non-retirement funding income is eligible for a tax deduction. This is set to change on 1 March 2016 to allow a tax deduction of up to the higher of 27.5% of taxable income or remuneration capped at R350 000 per year. This is a solid increase and will make the tax savings on an RA more relevant for higher income earners (albeit lower for the very high earners where the new annual rand cap is less than the previous 15% limit). Apart from deferring tax in an RA, the tax saving comes from paying a lower average tax rate on the benefits withdrawn from the RA at and after retirement, versus the tax saved on contributions. The first R500 000 of any lump sum you withdraw from your RA is currently tax-free (you can withdraw up to one-third, but this includes any pre-retirement withdrawals), and the rest of the benefit must be transferred to an income-providing product, such as a living annuity or a guaranteed life annuity. When income tax is paid on this benefit, you are likely to be taxed at a lower rate than when you were making contributions, which is where the additional tax savings comes in. Because of this, a disciplined investor paying income tax at marginal rate of 36% could pay more than 50% less tax on their retirement savings over their lifetime. This obviously varies depending on each investor’s personal circumstances, salary, age, how much and how long they have saved and any withdrawals made along the way. When comparing to a TFI product, the difference is that you have a future tax liability, whereas in a TFI your tax would already have been paid, but at a higher rate. What’s the catch? While the tax benefits of the RA and TFI are clear, it’s important to be aware of the restrictions before making a decision. RAs are governed by the retirement fund regulations, specifically Regulation 28 of the Pension Funds Act, which limits the exposure you can have to more risky asset classes, such as equities and offshore investments. In TFI products, there are no restrictions on asset classes but you can only invest in investments that charge fixed fees, which limits your selection. We have recently launched afixed-fee version of our flagship Balanced Fund to accommodate investors who would like to invest in our Tax-Free Investment Account. Another critical point, is that you can only invest R30 000 per year in TFI products. This is the maximum limit for all TFI accounts in your name, across product providers. If your goal is to save for retirement, the maximum annual contribution of R30 000 in a tax-free savings account may not be enough to sustain your lifestyle, and if you over-contribute SARS will hit you with a hefty 40% tax penalty. Access to cash may be another deal breaker: your investments in an RA cannot be accessed before the age of 55. You can access your TFI investment at any time. However, withdrawing from a TFI account impacts negatively on your lifetime investment limit of R500 000 – you cannot replace money that you have withdrawn. Other distinguishing features Both the Allan Gray RA and TFI2 are protected against the claims of creditors and do not form part of your insolvent estate. This feature is not applicable to all TFI products but it is applicable to the Allan Gray TFI, which is a life policy. You may nominate beneficiaries for an RA, although the trustees determine the allocation between your dependants and nominees. You may nominate beneficiaries when the TFI is a life policy. RAs are exempt from estate duty, whereas TFIs forms part of your estate and attract duty, although there are no executor fees if beneficiaries have been nominated. Which product wins? From a retirement savings perspective, in most cases RAs offer the best tax deal. However you need to be able to live with the restrictions described above. For long-term discretionary investments, it probably makes sense to put your first R30 000 into a TFI product. Remember, however, that you will need to be disciplined and resist the temptation of withdrawing from your TFI account. You only get to enjoy the long-term compounding benefits if you don’t dip your hands into the cookie jar along the way. Source: Allan Gray Please contact Kevin or Thato, email: invest@daberistic.com, if you have any queries about Retirement Annuity or Tax Free Investments |
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