Author: Pat Blamire

Estate planning, done properly

Yesterday, I attended the funeral of my client, Noeleen, who passed away unexpectedly.

I knew that we had recently updated her Will, and that the original document was securely stored in our Chartered safe – what a sense of relief for me after the initial shock at hearing the sad news! I also recalled that her husband, Gerald, had money in his own name, and immediate access to it.

I am aware that, at a time of loss and change like this, clients may depend quite heavily on us, their Financial Planners, to support them through this traumatic time.

With Chartered’s philosophy of retiring successfully, we, of course, plan for all the wonderful things that our clients’ money can do for them. In our RetiremeantTM Planning, we tend to focus on helping our clients live their most fulfilled lives – we plan for when things go well.

Noeleen’s passing reminded me that we also need to plan for when things don’t go well.

Frequently, an expected event is the sudden passing of a spouse. Because this can be an emotional time, it’s best to have an early discussion with client couples about what would happen if one of the spouses were to die: what assets would be sold, would they continue to live in their current home, and what changes need to be made in their Estate Planning.

The Estate Planning process, which on the surface can appear to be quite simple, is sometimes not as simple, as it turns out. When I sit with my clients and work out in Rands and Cents what their Wills mean, oftentimes amendments are essential.

In one instance, a client had inherited money from her parents, and she wanted this money to pass on to her children on her death, and not her husband. She only held two assets in her name – the investment housing this inheritance, and their family home. When I pointed out that if she left the entire inheritance to her children, her husband would have to come up with the money to pay the costs in her estate, and possibly risk losing his home. We changed her Will to rather leave the family home to Alan, and the investment, after paying all the estate costs, to the children.

Recently, I have been working with another client with a large estate who has minor children. He only came to me asking for investment advice, and did not think there was any necessity to consider Wills or Trust Deeds. Once I started delving more into these details it so happened that there were major concerns regarding his estate planning. No Guardian or Custodian had been appointed in his Will, there were errors on the Trust Deed, and those errors could have caused major problems had he died unexpectedly.

Asking clients to consider what things would look like after their demise is not an easy conversation to have. People do not like to think of their own mortality. Proper planning and honest conversations, though, help avoid unnecessary trauma when things do not go well.

When my salary stops, how do I draw an income in retirement?

Professional older women with short hair in suit jacket in boardroom for profile photoRetirementor and CFP® Pat Blamire is asked this question so often by her clients.  From years of planning for their future security, she understands that clients need to know exactly how drawing an income from their retirement savings works … for their peace of mind. Her article which follows here explains exactly how this happens.

In the build-up of your retirement savings, the tax treatment of these monies is predominantly split into two major categories:

  • Monies that you can claim tax relief on the contributions (such as contributions towards your company pension or provident fund, or contributions towards a retirement annuity). We refer to such monies as your “non-liquid investments”; and
  • Monies that you earn after tax, and save in different investments such as fixed deposits, unit trusts, endowments or tax-free savings accounts. We refer to such monies as your “liquid investments”.

The balance between liquid investments and non-liquid investments in retirement is within your power, and is a very important decision that needs to be made. Your Retirement Specialist will help you make this decision. This graphic may help you understand the difference between the two types of assets.

Your “non-liquid investments” have certain rules and regulations, and are not flexible. Your “liquid investments” are usually flexible, and, in retirement, are used to provide you with lump sums, say, to purchase replacement motor vehicles, pay for holidays, and can be used to top up your monthly income.

At retirement (any time after age 55), you can retire from your “non-liquid investments” and start drawing an income from these retirement savings.   To encourage people to save for their own retirement, tax legislation allows certain tax relief on lump sums that you draw from these investments: the first R500,000 of a lump sum is tax free; amounts between R500,001 and R700,000 are taxed at 18%; amounts between R700,001 and R1,050,000 are taxed at 27%; and amounts in excess of R1,050,001 are taxed at a flat rate of 36%.

You can then use the untaxed portion of your “non-liquid investments” to buy yourself either a Compulsory Annuity or a Living Annuity.   A Compulsory Annuity is provided by an insurance company or your company retirement fund, and they undertake to provide you with an annuity (pension) for the rest of your life, and usually for your spouse also (in most instances, the spouse’s pension is reduced to 75% of your pension).  When the surviving spouse dies, this pension then dies with them.

A Living Annuity is an annuity (pension) where you decide how much income you want to draw from your “non-liquid investments”.  Legislation requires you to draw an income of between 2.5% and 17.5% per annum of your Living Annuity, and this is paid to you monthly.   On your death, your surviving spouse (or beneficiary) will have the choice of either continuing to draw an income from your Living Annuity, or cashing it in, and receiving a lump sum, after-tax amount.   As your Living Annuity is untaxed money, if a beneficiary decides to cash it in, these monies will be taxed before being paid out to them.   No monies are ever left behind in a Living Annuity after your death, and will always be paid out to your beneficiaries.

Income drawn from either a Compulsory Annuity or a Living Annuity is taxable in your hands, and taxed according to the tax tables.   Investment growth within a Living Annuity is taxed at 0%, and it is therefore a very tax efficient investment vehicle.  On your death, it does not form part of your estate for estate duty purposes.

These are very important decisions to be taken when you get to retirement, and your retirement specialist will guide you through this process.

Take advantage of tax benefits of Retirement Annuities before 28 February

Now is the time to chat to your financial planner about making a lump sum investment into your Retirement Annuity, with the end of the tax year (28 February 2019) fast approaching.

We are regularly reminded about the tax efficiency of Retirement Annuities. You may not be fully aware, however, of the benefits and restrictions of this kind of investment vehicle.

Why choose an RA?

Your contributions to a Retirement Annuity are tax deductible, subject to certain limits. The deduction is limited to 27.5% of your taxable income or remuneration, subject to an overall maximum cap of R350,000 per year. There is no tax on the investment growth within your Retirement Annuity.

When you retire from your Retirement Annuity, there are additional tax benefits. Although you can only take up to one-third of the fund in Cash, this is taxed according to the Retirement and Death tax tables where the first R500,000 is tax free. Amounts in excess of R500,001 and less than R700,000 are taxed at 18%; amounts in excess of R700,001 and less than R1,050,000 are taxed at 27%; and any amounts over R1,050,001 are taxed at a flat rate of 36%. These tax rates are sometimes a lot lower that your normal marginal rate.

On death, your retirement annuity is paid out to your dependents, without going via your estate. This saves on Executor’s fees, and ensures that your dependents receive the proceeds without having to wait for your estate to be wound up.

Your dependents can either draw an annuity (pension) from your Retirement Annuity, or cash in your fund, or a combination of an annuity and cash. If your dependents take a cash amount from your Retirement Annuity, tax will be withheld from this payment. If your beneficiaries choose to receive an annuity, they will pay income tax on the income they receive from the annuity.

Generally, the proceeds of your Retirement Annuity are not subject to estate duty. There is an exception where, if you have made contributions towards your Retirement Annuity that are not tax-deductible, this amount is subject to estate duty in your estate.

Should you go insolvent, your Retirement Annuity is generally protected against creditors.

RA restrictions

The disadvantage of a Retirement Annuity is that it cannot be accessed before the age of 55. The exception is if you emigrate officially, you can take your Retirement Annuity savings before this age.

At retirement age 55, or later if you choose, you can draw up to one-third of the fund in cash, and the balance of two-thirds must be used to buy yourself an annuity (pension). If your full fund value is less than R247,500 you can take the full amount in cash.

Any contributions in excess of 27.5% of your taxable income, or R350,000 per year, are not tax-deductible and will be carried forward to the following tax year. If they are still not deductible then, they will eventually be tax-free on retirement, thus increasing the tax-free lump sum you can take. Any non-deductible amounts, however, will be included in your estate at death.

Your Retirement Annuity is not protected on divorce. Your ex-spouse can claim against your retirement fund in terms of section 7 of the Divorce Act. There are also certain restrictions as to how your Retirement Annuity may be invested, in terms of Regulation 28 of the Pension Funds Act.

Section 37 of the Pension Funds Act removes your freedom of testation regarding who your monies may be paid out to on death. It obliges the trustees of the Retirement Annuity to pay the death benefits to your “dependents” as defined in the Act. Trustees may overrule your beneficiary nomination, and may pay this amount to your dependents as they deem equitable. You have no control over how the assets in the fund will be distributed on your death.

A Retirement Annuity is a very efficient tax and estate duty vehicle. Be aware, though, of the limits on the tax-deductibility of contributions, and on your access to your savings. In addition, on your death you cannot control the distribution of the funds.

A Retirement Annuity is one of the few ways that you can make investments into a unit trust that are tax deductible, but you should invest knowing all the issues.

If you are considering making a lump sum investment into your Retirement Annuity, we suggest that you consult with your financial planner.

Pat Blamire is a CFP® and RetiremeantTM Specialist at Chartered Wealth Solutions. Pat has Advanced Post Graduate Diplomas in Financial Planning, specialising in investments and in Estate Planning. She is a member of STEP (Society of Trust and Estate Practitioners) and holds their TEP designation.

Following the Chokka Trail in Knysna

Lindajane and Trevor Thomson, Chartered clients living in Knysna, recently did the Chokka Trail.   It was an opportunity to taste our export quality calamari (chokka means calamari) and to enjoy the beautiful surrounds from Knysna to Cape St Francis.

According to Lindajane and Trevor, the South African chokka, which is imported overseas and which we don’t even get to taste, is absolutely delicious!  “After tasting it, you won’t eat the calamari we are served in South Africa, which evidentially comes from the Falklands,” say the Thomsons.

The Trail was also an amazing experience, with interesting walks along the coastline. The most challenging day was 17km on sand – very tough!

All in all, this was a unique and satisfying experience: gastronomically, aesthetically and in keeping physically and emotionally healthy.

Could this be your next adventure?

Financial planning gives you the freedom to dream

Pat Blamire, CFP® and Retirement Specialist at Chartered Wealth Solutions

In a recent financial life planning meeting with a new client, I chatted with him about budgeting for overseas trips.   He voiced his concerns about being able to afford expensive overseas trip once his salary comes to an end; he thought that, once he transitioned into retirement, he would be much more frugal when spending money.

I reminded him that this is the reason why the financial planning process is so important.  While we plan for our retired clients to draw an income on a monthly basis from the monies that they have built up during their lifetime, we also plan separately for their holidays and other lump sum expenses.   The planning process is critical to give them the confidence that they are not recklessly spending their retirement savings, and putting their retirement plan in jeopardy.

Don’t be frugal with living

I recalled the wisdom drawn from another client couple.   They had been married for over 40 years, did not have children, and had sufficient monies to last their expected lifetime, plus some surplus.

I asked them what the point was in living a frugal life, just to leave money to nephews and nieces; I encouraged them rather to enjoy their savings themselves.   I planned for two overseas trips in their budget, and urged them to consider where they would like to go.

A week later, a very excited Thomas phoned me to say that they would like to go on a cruise in the Mediterranean: was I absolutely sure that they could afford it?   I reassured them, and they booked their cruise for three months hence.   I had such pleasure in watching the excitement on their faces and in their voices, as the date for departure drew nearer.   Thomas, prone to worrying, began to be concerned about how best to arrange his foreign exchange, and started watching the exchange rates.   As the deadline got closer, Thomas and Felicity were uncertain about what wardrobe to pack as there was a certain number of dress-up dinners on the cruise, and they wanted to make sure they had suitable attire.

On their return we met to chat about their trip. I saw photographs of them sitting at the Captain’s table, beautifully attired, and of the various destinations they had visited.    Their next question? “Can we afford a second trip?”   I assured them they could, and the planning and excitement started all over again: where to go, which cruise line to choose, and so on.

Felicity is no longer with us, but I am so glad that she and Thomas took these trips and that they had such fun in planning them.   Whilst Thomas misses Felicity terribly, he at least has the memories of these fun times they had.

Effects of the proposed wealth tax in South Africa

Wealth tax is a hotly debated topic, especially since South Africa’s taxpayers are already overburdened. So, the invitation from the Davis Tax Committee (DTC) for public submissions on the desirability and feasibility of such a tax has placed the issue squarely in the limelight once again.

The Government is understandably keen on this idea as it needs more revenue to fund the bloated civil service, sustain high levels of other wasteful (and often corrupt) spending, and avoid the policy reforms required to stimulate growth.

Globally, wealth taxes have steadily declined in recent decades.   By 2010 wealth taxes only existed, on an ongoing basis, in three member countries of the Organisation of Economic Cooperation and Development (OECD).   South Africa has a tiny tax base, and is heavily dependent on a small group of individuals and companies that pay around 60% of the personal and corporate income taxes collected each year.  It is feared that imposing a wealth tax on this small group could encourage a flight of capital and skills which would further weaken the economy.

Leeching land-owners

The proposed forms of such a tax in South Africa may include a land tax, and an annual wealth tax.  It is assumed that by a land tax is meant an annual tax on the value of land.

It is hoped that at least primary residences should be exempt from a land tax.  This would be in line with the way primary residences are treated differently from other fixed property for purposes of Capital Gains Tax (CGT).   The justification for such an exemption is rooted in the fact that private ownership of residential property is an enabler for wealth creation, something which is desperately needed in South Africa.

There is the question of what other land should be excluded?   Normal exceptions of land for recreational, educational, religious and charitable purposes, should be considered.  Agricultural land should also be considered in order to avoid a further burden on already thin profit margins.  Famers in some areas, for example, the Karoo, are notably asset rich and cash poor.  An annual tax on land will place them in an even more serious cash squeeze.

If an annual land tax is levied on rented residential property, this sector will experience upward pressure as landlords will pass such a land tax on to the tenant, which will increase pressure on already stretched middle class citizens.

If there is to be a threshold value on such property, what should this threshold be?   There is the possibility that an extremely wealth person with several pieces of land valued at below the threshold will effectively escape the tax.

Many elderly people hold onto their family homes.  These homes can have quite a high value due to market movement, but their elderly occupants can be quite cash poor.  This reality is recognised by many local authorities with special discounts on municipal rates for the elderly.   If such a tax were levied, it would force elderly people of out of their homes.  In addition, quality accommodation in retirement villages has increased by far more than the average increase in property values.  Imposing this tax with too low a threshold will prejudice this already financially vulnerable sector of the population.

Are you one of the few?

The complexities of an annual wealth tax are daunting.   To qualify as a tax on wealth, the net worth of the taxpayer will have to be determined on an annual basis.  This will become an enforcement nightmare from a SARS point of view.

A further question is at what net worth does a person qualify as wealthy?   This question has different answers depending on the life stage and circumstances of the individual.  A 35 year old with R15m may be regarded as wealthy.  However if the 35 year old is disabled, this is not a large amount of money.   At age 65, upon retirement, if the R15m is the sole source from which income must be produced, it is similarly not a large amount of money.  If an annual inflation-linked income of R850,000 per annum is being drawn, it is expected to last less than 25 years.

Very few developing countries have an annual tax on wealth.  Developing countries, by their nature, need foreign direct investment to grow and develop their economies.  They need to be attractive to investors to bring that desired level of foreign investment to grow and develop their economies.  Extra taxes are always a deterrent to capital inflows.

Currently in South Africa, taxpayers with a taxable income in excess of R1m make up only 3.5% of the taxpayers, while contributing 38.5% of the income tax revenue.  Ultimately, South Africa, like all developing countries, needs more growth and not more taxes.

The words of Winston Churchill are a sober reminder:  “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

Minding your Ps and RAs

So, you have been saving faithfully towards your retirement.  You are confident that you have enough stashed away in the various investment vehicles: RAs, Pension, Provident, Preservation, Unit Trusts … and now, you salary has come to an end.  How do all of your investments come together to give you an income … and what are the tax implications?  Certified Financial Planner, Pat Blamire, chats to Michael Avery on the Classic FM’s Classic Business programme, to help retirees get the most out of their retirement savings.

Click here to access the Classic Business radio discussion.

Demystifying tax implications of retirement funds

And drawing an income one day …

Whilst we are still working and earning a monthly income, we put away money towards our retirement. This is so that, one day, we no longer have to work and can start drawing an income from our retirement savings.   That is the plan, but I find that many of my clients are confused regarding how their different investments come together at retirement in order to provide them with this income.

Minding your Ps and RAs

The main retirement savings vehicles are Pension and Provident Funds, and Retirement Annuities.   The main difference between these different vehicles is that the former are employer provided funds, whereas the latter are typically used by self-employed individuals, or those people who want to increase their retirement savings.

In addition to these retirement savings vehicles there are also discretionary investments such as unit trusts, shares, tax-free savings accounts, properties, which supplement your retirement savings.

In terms of the Income Tax you are allowed to contribute up to 27.5% of your income towards retirement savings vehicles (Pension and Provident Funds, and Retirement Annuities), and to obtain tax relief on these contributions.   You do not receive any tax relief on contributions made to your discretionary investments.

When you reach retirement and wish to retire from your retirement fund investments, there are certain tax concessions that you are entitled to.   For Pension Funds and Retirement Annuities you are entitled to take, in Cash, up to one-third of these savings.   The first R500,000 of this Cash amount is tax-free, and the balance is taxed according to the following tax table:

  • R500,001 – R700,000 @ 18%
  • R700,001 – R1,050,000 @ 27%
  • Amounts in excess of R1,050,001 @ 36%

The balance of two-thirds needs to be invested in an annuity (pension), which will pay you an income in retirement.   As you were entitled to claim your contribution towards these funds as a tax deduction in the build up to retirement, when you start drawing an income from your annuity (pension), this income is taxable in your hands according to the South African Revenue Service published tax tables.

The rules for Provident Fund members are slightly different.   Previously they were entitled to cash in their full Provident Fund savings, which amount would be subject to the tax tables mentioned above (first R500,000 tax free, etc.).

However legislation changed on 1 March 2016 whereby, going forward, members of Provident Funds would be subject to the same rules as those members on Pension Funds and Retirement Annuities, whereby they could only take one-third of the value of their fund in Cash, and the balance of two-thirds must be used to provide them with an annuity (pension) in retirement.   There are certain exemptions to this requirement:

  • Anyone over the age of 55 on 1 March 2016, who was a member of a Provident Fund, would not be subject to these new regulations
  • In addition, if the fund balance of a member’s Provident Fund is less than R247,500, they will not be forced to buy an annuity with two-thirds of their Provident Fund savings.

In addition to your retirement fund savings, it is important that you also have discretionary savings which can be used to top up your monthly annuity (pension), and to pay for lump sum expenses such as holidays and new vehicles.

The plus of unit trusts

With a unit trust it is a simple matter to draw additional income or lump sums.   Units in the unit trust can be sold for this purpose.  It is a little more difficult to draw monthly income from a share portfolio as shares normally need to be sold in order to do this.   With a property that is rented out, you will receive the rental income on a monthly basis.   Where a problem may arise is when you do not have a tenant for your property, or the tenant refuses to pay and you struggle to evict them.

A Certified Financial Planner can assist you to navigate through these various decisions, and advise you on how your retirement savings should be structured, so as to take advantage of any tax concessions you may be entitled to, and ensure that you will have sufficient income in retirement.

Six tips for raising money-wise adults

As a financial planner, it is seldom that a conversation with my clients concludes without the 12345subject of their children’s financial stability emerging.  As a mother of two sons, I find myself sharing many of my clients’ concerns, even into our children’s adulthood. 

These concerns, it seems, are with good reason.

A US study has revealed a pattern regarding the passing on of wealth within families:  the first generation makes the money, the second maintains the money, and, in 90% of cases, by the third generation the money is gone. This gradual decline is captured in the cultural proverb: “from shirt sleeves to shirt sleeves in three generations”.

Are there certain practices that we as parents can put into place to help our children create their own financial freedom?  How do we balance messages of recognising the importance of money and of guarding against materialism?

Teaching responsible money management 

My son, Ryan is extremely competent, has a strong personality and holds down a very demanding job.  I have no doubt that he would cope were I no longer around.

Donovan is a gentle man, with a dream of being a missionary … but with a wife and tiny daughter, his idealistic nature is simply not putting food on the table.  I worry constantly about how he would manage were I absent.

I am fascinated at how some of the younger generation are so capable and competent whilst others are just not ready to take on the responsibilities of adult life. And, of course, proper money management is very much a part of creating a successful career and family in our adult years.

I have distilled from my wider reading some great tips for helping parents create the ‘scaffolding’ for their children to establish a healthy and responsible attitude to managing their money.

  • Talk to your children about your values, your money, your life. Do they know what sacrifices their grandparents and parents made to create lives of relative ease, or even indulgence, for them? Do they make a connection between hard work and prosperity? Do they know that work is a great source of a sense of personal achievement?
  • Allow them to be different to you. They have grown up with a completely new set of social norms, even though you have passed on your values. They may, for example, value a variety of jobs over the kind of stability or loyalty you have treasured. That’s OK – their generation is going to live longer and will probably have to be job-nimble.
  • Teach them to be independent. A sense of control over their own lives engenders confidence and a belief that their actions and attitudes impact their world. Model healthy and independent relationships yourself; let your kids know it’s fine to be separate – be alone and sometimes to disagree; seek opportunities to show your own perseverance in the face of difficult tasks.
  • Don’t take their troubles away – they need to work through their own trials and tribulations in order to grow. The Monarch Butterfly needs to force its own way out of the chrysalis in order to strengthen its wings to fly, or it will not be strong enough to survive.
  • Tell the family stories, especially to your grandchildren, of what life was like when you were small – this is the glue that holds a family together, and also helps to maintain the family history for when you are not around one day.
  • Make family memories: give with a warm hand. Plan and share special celebrations together.

Imagine a gift that you could give to your children, even your adult children.  This gift will enhance their self-esteem, create the foundation for a confident approach to life, and develop skills that will stand them in good stead throughout their lives.  This is the gift of being financially responsible.

1234Pat Blamire is a Chartered Financial Planner, a CFP® professional, and has a post-graduate Certificate in Advanced Taxation, and a post-graduate Diploma in Financial Planning. She has a passion for inter-generational wealth, and the responsibility that goes with passing on money to the next generation. In this article, she draws from many years of financial planning for clients, and shares a lesson on helping our children live abundant lives

Helping our children live fulfilled lives

I am guilty of it, perhaps you are also … and I wonder if we are taking away from our children the resilience to facepat life’s challenges, and, ultimately, the chance to live a fulfilled life.

I am referring to the help that we so often and so readily offer our children when we feel they need it.

We all want our children to live happy, secure lives, and it is natural that we want to help them when they stumble.   In a lot of my interactions with my clients, our having established that we are on track with a workable financial plan, the conversation drifts to discussing the children and their financial preparedness for the rest of their lives.

The snagging spot is often, dare I say it, not the children, but well-meaning parents (I am not without blame here, I suspect!) who feel guilty if they are not helping their children overcome their (mostly, financial) difficulties.  It so frequently seems that a parent’s way of showing love is by smoothing the path through challenges.

A recent book that cites on an ancient legend has created an epiphany for me!

The Voice of the Rising Generation by James Hughes et al. was an excellent read.   The poem The Odyssey, composed by Homer almost 3,000 years ago, is woven throughout the authors’ message.   They use the poem as an analogy, referring specifically to Odysseus’ son, Telemachus, and his life journey when he goes on a quest to find his wandering father, and, in the process, to find himself.

Meanwhile, Odysseus comes across an island of the Lotus-Eater people – this is the part that really resonated with me!   On eating the Lotus, the islanders forgot all about any kind of personal desire to strive and struggle, and they became content to spend their lives grazing on the flower.

Do you see the lesson?

The authors contend that, where we have brought our children up with wealth, and possibly spoilt them, in the process, we have taken away from them the desire to rise up on their own, and live challenged and fulfilled lives.  They, as it were, are feasting on the Lotus flower, all need to carve their own success undermined by the lethargy of aimlessness.

While these ‘privileged’ children may enjoy the ease that easy money buys them, at some stage I am sure that introspection will creep in, and the frustration of boredom and not being fully challenged will start to unsettle them.   The spell of the Lotus flower will need to be broken in order for them to rise to live challenged lives, and not let complacency stagnate them.   Questions will start to surface such as … Is this all there is to life?  Could there be something more?   What would that something look like?

Wealth can also make us forget why work is important (that sense of personal achievement), what authentic relationships are like and our dreams of being the best of us we can be.

For us to live fulfilled lives, we must break the spell of the Lotus flower and relish that sense of self-actualisation that comes from recognising and developing personal strengths that we harness to overcome our challenges.