There’s nothing like lockdown to induce a bad case of wanderlust. 11 months into the biggest bummer of many of our lifetimes, it’s wonderful to hear some ordinary good news. Remember weddings? Lady Kablo certainly does. She got married in December. Lockdown is giving her a little time to think about what she’d like for her perfect honeymoon.
Many of us striving for financial independence hope to travel once we no longer have to work. Every time I take a trip, be it abroad or local, I’m reminded travel money works differently from ordinary money. While I’m extremely frugal in my day-to-day life, when I travel I don’t think about money. I also don’t worry about how much I eat or drink, I never check my phone and in general I’m just a much cooler person.
In this week’s episode we help Lady Kabelo think about her honeymoon. In the process, we reminisce over some of our own adventures and dream about a time when we can do exciting things like visit friends and go to the shops. Hopefully this episode delivers a spot of whimsy to your lockdown.
Lady Kabelo
I got married in December. Having spent the last 3 or 4 years following your savvy advice to tackle debt, emergency fund, insurance, retirement and medical aid, the time may have arrived for an international honeymoon trip
(Yes, Covid is also a factor. I'm hoping when it's over some hard-hit places will be a little cheaper in an effort to attract visitors.)
Every overseas vacation I've taken has been with my parents, so I've never considered the planning and budgeting that goes into an international vacation.
My biggest nightmare is running out of money in a foreign country. As a result, I am leaning towards all-inclusive packages - even if we overspend, we'll at least have food. The downside is you're in a resort removed from the "real" place and people but then you can get cabs into the nearby towns for daily excursions.
But I'm not sure if this is the most cost-effective way to travel. So, my questions:
Win of the week: Charlene
Thank you from the bottom of my heart for the financial education. I’ve been reading and listening to all your advice since lockdown in March and it has really made a HUGE impact on my financial decisions. I cannot thank you enough. I live in Mossel Bay. Should you ever be in the area I would love to offer lunch/dinner to thank you both for everything.
I’ve been getting my financial house in order ever since. I have identified ETFs that I have invested in and I am very happy with the performance. I have invested in Satrix Emerging Markets(20%), Ashburton Global 1200 (60%) , Sygnia 4th industrial revolution (10%) and Satrix Nasdaq 100(10%).
I have now sold a property and have money I want to invest. I want to invest it in the overseas markets directly. I’m currently using EasyEquities and I see I can use their platform for international investments as well. I had a look at their fees and I see they charge a brokerage fee of 0.25%. This whole world story is a bit intimidating and scary... so I am thinking to approach it using EasyEquities even though I know it's a bit more expensive. What are your views on this?
My next hurdle is choosing what to buy. I want to buy similar ETFs to those I currently have, but don't know where to start. I saw Vanguard has a Total World stock ETF etc etc. Could you please kindly point me in the right direction?
Dylan
I was wondering whether a RA can be paid out to more than one person?
In a family where the wife was a stay at home mom for most of their life and they only really have the husband's retirement fund to live off when he retires, would it be possible to pay the fund out to both people in order to split the retirement income between two incomes to save on income tax?
I read the blog on Tax on lump sums in retirement. It states that if you have discretionary investment funds available at retirement, it's a good idea to hold on to your retirement savings and rather use your discretionary savings to cover expenses. It explains that by doing this, you allow your retirement savings to grow some more.
Now this got me wondering, why would you want to cash out discretionary investments to have your retirement savings grow more? It seems the wrong way around to me. If your retirement savings grow larger, sure you save on the CGT and DWT inside the retirement product for the time your discretionary savings last you, but now you will probably pay more income tax on the extra retirement income than you ever would pay on CGT if you did it the other way around.
My gut tells me it would be more efficient to take your retirement income when you start needing it and supplement that with your discretionary savings where required while trying to minimize the CGT of the investments you cash out.
Jean
We have been saving for our son's tertiary education and now have a sum in our bank account earning pathetic returns. We will need to start drawing from this in about 9 months time. We have been thinking of Satrix world as we really need better returns. Are ETFs/ international ETFs, too risky for this application?
Chad
I am a great fan of 1 share to rule them all. (Vanguard total world in my case). However, your recent podcast wrt the dangers of too much exposure offshore got me thinking about Rand-hedging. What would you say is the best ratio of Offshore vs Local equities in a total equity portfolio (apart from 20% which is Reg28 compliant)?
Then there is the question of which is the most diversified local ETF? I have been investing in the Satrix 40 when the Rand is really weak but realise now that this might not exactly be a Rand-hedge ETF. Is the Sygnia itrix SWIX 40 ETF a good rand hedge option? Please help?
Martin
My brother sent me a link to one of your shows when I took an interest in my finances and I’ve been hooked ever since.
Thanks for all the education, even if the majority goes over my head at the moment. But I can confidently say there is a huge difference now in comparison to when I started a few months back.
I follow the Dave Ramsey baby steps: I am currently saving my emergency fund and up to two months-worth of expenses.
It is a decent amount but I feel it is being wasted in a savings account.
I keep hearing everyone say put the money in a money market account.
I have been looking around with no luck. I bank with FNB and for example the one they propose I open is one with an opening amount of 100k.
I also came across one from Old Mutual which seems reasonable and you get a card as you would want to have easy access to the funds when needed.
What are the options out there and which do you guys use?
Time is such an odd ingredient in the realm of wealth creation. When treated with respect, a good amount of time can be your greatest ally. When ignored, however, time can be your biggest risk.
In a country with so much historical inequality, the idea of intergenerational wealth seems entirely mythical. However, a small amount of money sprinkled with a great deal of time makes building a nest egg for the next generation seem downright simple. By the same token, sleeping at the wheel creates an opportunity for inflation to eat away at real returns.
In this week’s episode, we explore intergenerational wealth building strategies using two real world examples. Is this our cutest episode yet? You tell us.
Mark
I have twin girls who just turned five.
I have contributed to their own respective RAs since they were eight months old. I started at R1k a month each and this contribution has increased by 10% a year. I will keep up with the annual increases for as long as possible, but I realise the contributions will become pretty large over time.
My girls have Capitec bank accounts and are registered with SARS and file tax returns. They are building up tax credits from the RA contributions in their name with SARS given they have little or no taxable income.
I realise this might not be the most tax-efficient or tax-effective option for saving for your kids and DeWet and others might disagree with it. I have outlined below why I went with this strategy over TFSA or unit trusts in their name or the plethora of additional options and combinations.
There are pros and cons to the above approach compared to other kids saving options but after I weighed several different approaches and strategies, I decided to go with this one for now for better or worse.
Wesley
If the lifetime limit is not increased periodically, the TFSA scheme is abandoned to inflation and will become worthless, much like the interest income exemption has been abandoned.
At a 4.5% midrange inflation target, assuming the original 30k annual contributions took 16.7 years to max out the 500k, the value of the 500k limit at that date will be around 240k in today's money for someone starting out on that future date. Those future starters will be proportionally disenfranchised from the TFSA scheme.
The time horizon from birth to earning enough to contribute to a tax-free account is 20 or 25 years. The optimal time horizon for a TFSA is much longer than that.
A child born now, six years into the TFSA scheme, starting their contributions at 25 years old would have lost 75% of the value of the original 500k limit. It's not a very valuable loss at that point.
I’m assuming the lifetime limit will always increase to allow an annual contribution. If not, the best possible course of action is to get in on the ground floor on this once off opportunity before it becomes worthless.
Win of the week is: Henno
Feedback for Lizl, whose company wants to force her to move her brokerage accounts in-house.
“It’s always important to take a closer look at the conditions of employment in your contract on the day you started. Anything that changes after that requires a process of consultation. The employer can’t make changes unilaterally. The consultation process is more than an email from HR. What typically happens is HR sends an addendum to your employment contract, none of the employees query it before signing and then it’s as if the consultation happened and you accepted it. I’d argue if my original employment contract didn’t include anything about this, if there was no consultation process and if I didn’t sign anything, they can’t enforce that rule. If they want to fire me after that, I’d go to the CCMA on the grounds of an unfair dismissal.”
Gerrie
My employer is massively exposed if I were to abuse any potential privileged information to do some insider trading, either on my own accounts or within family accounts. The regulatory world has changed massively in recent years and fines from the FSCA can run into 100s of millions in addition to imprisoning my employer’s directors. Banks and other institutions take this very seriously and would rather have too harsh restrictions on their employees than to allow anyone to abuse the system.
Financial institutions force all their employees to trade under a watchful eye. It’s not fun, but I understand why.
I informed my employer’s compliance team of all my and my family’s accounts at EasyEquities and I told them I have no desire to move it. Turns out the process was slick and simple. I only buy ETFs at EasyEquities and never individual shares. My purpose is to invest and not to trade and ETFs fall outside of the trading restrictions. I made a declaration to that extent and the compliance team told me to happily continue doing so. They may ask me for a statement from time to time and I’ll gladly supply it, but there is no need for any ongoing burdensome process.
The entire process took me half an hour to resolve. I made full disclosure. They are aware of my accounts and my or may not check up later. I have undertaken to inform them the moment I intend doing anything other than investing in ETFs. I prepared myself for much pain that never happened. So Lizl– my experience was that there was no need to move accounts and trigger capital gains events. What a relief.
Koketso
I started looking into my investments and was horrified that:
- My EAC was sitting around 2.45%; 1.15% of which was advice fees
- The general performance of my investments in the last 3 years was not great and with the 2.4% in fees I practically kept money under my mattress and all that prudence was for nothing!
What I have done so far is:
- Got rid of my financial advisor dropping 1.15% of fees from my EAC
- stopped contributing to my RA as I have intentions to move abroad in the next 2-5 years
- Moved funds from the more expensive products to a global feeder while I figure out what to do
I recognise that this is not ideal, but this was a first step and one step at a time!
And the questions:
- If I wanted to say move to a cheaper provider, how do I actually do that? Would there be CGT on my unit trust and TFSA?
- I am thinking the following for my ETFs
Brendt
My mother is 62 years old, and will be retiring from work in Apr 2022. My parents plan to save R20k a month from now on until they retire. My mother has no retirement products apart from one RA that has a current balance of R80k. My parents want to have as much of their savings available in discretionary savings as possible.
My idea was for them to pay the R20k monthly saving into my mother’s RA until it reaches a balance of about R220k. Then open up another RA with a different service provider and save the remaining monthly amount to this RA.
That way my mother would have two RAs on retirement, both of which will have a balance of less than R247k, which is the lowest amount for which it is mandatory to buy a living/guaranteed annuity with. Meaning that she would be able to withdraw 100% of both RAs as a lump sum, tax free (She has yet to make use of the R500k tax free withdrawal concession), to invest in ETFs for retirement.
She will be able to reduce her taxable income in the year or so that she invests the money in the RAs, without being bound to a guaranteed/living annuity and the personal income tax implications on retirement (CGT is sooo much cheaper). In effect SARS will be paying them. :)Chris
Many young South Africans are drawn to the idea of working on the yachts in the Mediterannean as a way to explore the world and earn some hard currency. I spent five months as a steward, sailing from Monaco to Barcelona with plenty of glamorous stops along the way!
I managed to save some of the Euros that I earned overseas and those are in a Standard Bank Isle of Man account (earning next to no interest). I am keen to make that cash work a bit harder, so I would like to exchange it into Rands and invest it in some ETFs (a question for a later date). I have been hesitant to “just transfer” the Euros to my South African bank account until I fully understand the tax implications.
What is the most tax efficient way to get the funds from my Isle of Man account to my South African account?
What is the best way to actually transfer the funds from one account to the other?
Brett
My emergency fund will cover about 6-9 months of living costs. That is more than I’ve got invested in equities. I’d like to have much more exposure to equities to get maximum growth over the next 20 years.
How would you recommend investing such a lump sum to gain relatively high growth for cash (5-10%), while keeping it relatively low risk, and liquid?
I’ve considered the following:
FNB Money Maximiser - 3.75% interest, completely liquid. The interest rate I believe is fixed to the lending rate as it was closer to 7% a year back. It’s still higher than typical liquid saving accounts. Fixed deposit or 32 day notice was not considered liquid enough.
Money Market products offered the highest growth out of the products i looked at, i.e. a few percent above inflation. But the costs and fees were also the highest, and based on recent performance and inflation, the high fees largely eroded any gains.
High dividend or REITs ETFs, which seems to have a yield of about 2-5%, so very much in line with inflation. (And then some growth)
Bond ETFs, like New Funds GOVI, which was about 6-7% growth based on 3-5 years.
And last is to keep it in my mortgage to reduce the interest I pay each month, at prime.
So many options right? Would you recon it is best to keep the cash?
Candice
De Wet mentioned asking your HR department to adjust the RA contribution figure on their payslip to include the personal contributions.
My payslip has been showing an R2906.75 shortfall in contributions as I have been doing my own thang. I asked the HR department to adjust this and the difference is just over R1000 extra on my net. This will be going straight to my TFSA monthly.
Lebo
I currently have a tax free account with EasyEquities. I've maxed out the R36000 limit for the year and I know the lifetime limit is R500000.
I was wondering once the lifetime limit is reached, can I open another tax free account and receive the R36000 tax free benefit on the new account? Basically can I start the process over with another account and effectively have a R1m lifetime limit?
There’s more than one way to raise taxes. You can subject yourself to the ire of the masses by being up-front about it, or you can eke out little tax wins on the sly. Our government likes to do a bit of both.
This week, with the help of Wesley, we explain how tax creep works and what you can do about it. We also talk about lump-sum withdrawals. You are taxed on previous withdrawals taken after the following dates:
If you took lump sum withdrawals before these dates, consider that an entry for your gratitude journal.
Wesley
It’s been 6 years since the lump sum benefit was last adjusted and we have lost 26.5% of the value of the incentive during this time. Where is my inflation adjustment? Obviously someone is desperate for cash right now, and SARS doesn't think it is pensioners.
When the lump sum is adjusted from 300k to 500k, but you already took 300k in the past, what happens when you take a 200k lump sum from your other RA account?
More complicated. Was 300k, take 400k, pay 18% tax on 100k = 18k tax. Now the limit is 500k. take another 300k lump sum from your other RA account.
What on earth happens?
Do you not get any benefit from the increase?
Does 100k at 18% wipe out half of your new 200k tax free lump sum?
Or do you treat it as a 700k lump sum on the new provisions less 18k tax previously paid on lump sums.
It seems like a good idea to have at least 2 RA accounts.
Win of the week: Candice
Just thought I'd say a HUGE thank you. After being introduced to the show just 3 years ago, I feel like we are in a committed relationship. It's the only podcast I listen to and look forward to my Monday morning drive to work with you guys.
I finally budgeted. I’m horrified to see where our money goes monthly. I can't complain though, because without knowing I wouldn't be able to change spending habits.
Martinus
I've always championed Total Return ETFs. Outside a TFSA you’d have to pay Capital Gains Tax. TRTs also save on brokerage costs and admin. However, the feedback from De Wet has me reconsidering that approach.
If the fund is a feeder fund like the Satrix MSCI World, is there any local tax event? To me, it makes sense that if they just reinvest the distributions they receive outside SA the only tax event would be in the foreign country. Your only local tax concern then is CGT.
It is possible to switch from Satrix to 1invest MSCI world at an increase in fees of 0.05% and then have dividends paid out. This leaves an increase in brokerage costs and personal admin.
Martin
I’ve been putting money into the Satrix World. As I understand it, I lose the benefit of the saving on dividend tax in a Global ETF, but I’m at least hedged in a way with the rand weakening over time, and it should show better growth over time than local (who knows though).
So I just listened to your podcast (Asset Allocation Problem – 14/12/20) regarding total return funds (like MSCI World). Am I correct in my understanding that the dividend tax is in the region of 28%, not 15%? Furthermore, are we saying that tax free investments should pay out the dividend, and not reinvest? That feels wrong though, that money then can’t keep growing?
Then, to make matters worse, when you Google “tax on tax free global etf”, you get many links proclaiming that you do not pay ANY tax on either local or foreign tax free investments, e.g. https://www.sygnia.co.za/press/how-to-invest-offshore-and-pay-zero-tax
Please put me out of my misery on this one!
Lizl
I have the *honour and privilege* of working for a financial institution that recently decided all employees must close all accounts with other brokers and open a stockbroking account with them. Exceptions may be approved, but I don't want to open that can of worms just yet.
I have EasyEquities accounts - both an Easy Equities ZAR account with individual shares and a TFSA account with a few ETFs.
Does Easy Equitites count as a stockbroker in this case? Should I just sell the individual stocks and hope they'll let me keep the TFSA? Does the TFSA fall under this prohibition as well? And why is it that they can legally do this?
I have zero energy for the admin of moving and the inevitably higher fees, preferential staff rate or not.
Greg
Normally I put my TFSA allocation of R3000 per month into my bond. At the end of the financial year I draw R36000 and buy the Ashburton Global 1200 ETF in my TFSA.
Should I still be doing so for the coming year? Is this still the one ETF to rule them all?
For all the flack they’ve been getting, there’s no easier way to reduce your tax liability than pension fund contributions. In this week’s episode of The Fat Wallet Show, we help Megan correct an assumption about her tax savings on retirement annuity contributions. We use the opportunity to talk about offshore allocation and prescribed assets.
Win of the week: Megan
I listened to your "To RA or Not" episode today, and one of the questions (about RA contributions vs paying off a bond) reminded me of a dilemma I've been wondering about for a while.
I'm 25 and working as a junior engineer. My marginal tax rate is at 26%. I'm currently putting R3000/month into my TFSA (Satrix MSCI World ETF with Easy Equities) and R2000/month into a Sygnia RA with decent fees. I save R1000/month in a TymeBank goalsaver for holidays. After that I can't really afford more savings at the moment, which means I'm not adding anything to my long-term discretionary investments. (I have an emergency fund and enough short-term investments for my needs and goals.)
My question is this:
Considering
1) The Regulation 28 requirement on the RA which limits global diversification,
2) My low tax bracket, and
3) The fact that Rand devalues around 4% per year to the dollar,
is the RA really worth it?
Putting money into an RA saves me 26% now. But what if I were, instead, to put that R2000 into a discretionary investment (e.g. MSCI World ETF)? If the MSCI World outperforms the local 70% of my RA by 4% a year (which seems likely imo), then surely the discretionary fund would be "outperforming" the RA in the long term?
For arguments' sake, with the assumption that global returns outperform Rand returns by 4%, then after 10 years, R2000 in the RA + 26% (assuming I could magically reinvest the tax return instantly) would be worth
(2520 x 0.3 x 1.04^10) + (2520 x 0.7) = R2883.
While R2000 in the discretionary global ETF would be worth:
(2000 x 1.04^10) = R2960.
(I mean this in relative terms, I don't really expect 0%).
This difference would only get greater over time due to compounding.
The other thing is that the RA money will all get taxed in future. And that the RA fees, although low, are higher than the discretionary fees.
So while I fully understand the tax benefits of an RA for people earning at 45%, I'm not as convinced for those of us in some of the lower brackets. What do you think? Is my assumption wrong about global markets showing better returns? Is it normal to feel this uncertain about putting so many eggs in the SA basket, or am I being silly? Is an RA worth it for me now, and if not, when does it become worth it?
2020 gave us all a new appreciation for the humble emergency fund. In this episode of The Fat Wallet Show we think about some steps you can take to prepare your money for the year ahead.
Win of the week: Celma
I turned 55 and had to visit my bank (Nedbank) a few months later.
I asked them if there is any reduction in bank fees when you turn 55 and to my surprise my bank fees got waived provided I make a R10 000 deposit. I only get 2.5% on the deposit, but save about R300 in monthly bank fees. The facility is probably available to everybody but seems like you must ask about it - it is not as though they tell you or advertise it.
Zee
I've been listening to you guys like a fiend for the past 3 months and I have managed to follow your instructions of having insurance, reducing living expenses etc. Now I'm at that stage of forming my retirement strategy. Annnnnddd I'm pretty much having a bit of a breakdown as to whether I'm going in the right direction.
So I'm 28 and working in South Korea. I've never had any debt, I don't pay rent, car, I have no kids or financial dependents. This allows me to save about 54% of my pay, which is split between my RA 16% and about 4% Unit trust (which I top up with my annual bonus) both with 10X .
Then 30% in a ZAR Easy Equities monthly (I just opened my TFSA which I will max out on the 1st of March as I have already saved the R36K). Ohhh I have saved 3 months salary as an emergency fund.
Should I keep the UT as a means of saving a year's worth of salary for when I am old and wrinkled and the medical costs are eye wateringly high or to supplement my income when the market falls apart. Orrrrr should I just leave that and go beast mode into EasyEquities and the RA.
I also wanted to know if I should push to save up to a 6 months salary even if it takes me more than a year? And put it into a money market or savings account cause the prospect of going back to being unemployed for a long period of time scares me to death!