Email your queries to [email protected] or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.
IS A FUND OF FUNDS MORE EXPENSIVE?
Is it true that it is typically more expensive to invest in a unit trust fund of funds (FoF) than in an individual unit trust fund? Name withheld
Marius Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: Historically, a FoF was more expensive, because it entailed an extra layer of fees. Over the past few years, this has changed, particularly in the case of the larger FoFs, which have negotiated significant discounts with the asset managers of the underlying funds. These discounts have reduced the costs of many FoFs to such an extent that, in some cases, it is now cheaper to invest in an FoF than directly in the underlying funds.
One of the cost benefits of multi-managed FoFs is that switches between funds do not trigger capital gains tax. As a result, an FoF manager can make investment decisions that it believes are in the best interests of investors without investors incurring a tax liability.
ANNUITY’S RETURNS ARE TOO LOW
I am 62 years old and have a Classic Linked Life Annuity Plan with Liberty. I was under the impression that it would pay out a lump sum on retirement. I discovered that it doesn’t. I am receiving a negligible monthly amount, and I no longer see the benefit of this plan. What can I do to earn the maximum return on this investment? Can I be paid out? Is a section 14 transfer to another company worth considering? JM Meyer
Riaan Strydom, a financial adviser at PSG Wealth in Mill Park, Port Elizabeth, responds: To put the answers to your questions in perspective, the statement that you provided shows that the value of your living annuity is about R60 000. The capital is invested 40 percent in bonds and 60 percent in listed property.
You could diversify the underlying portfolio and invest more aggressively in an effort to improve the returns. You could consider including local and offshore equities to structure a more growth-orientated portfolio. These switches are normally free of charge on an investment platform, and there are no capital gains tax implications within the living annuity.
A living annuity cannot be transferred in terms of section 14 of the Pension Funds Act, but in terms of section 37 of the Long Term Insurance Act. A transfer will change the administrator of the policy, but you will still have to choose the underlying investments. The only benefit of such a transfer is the possibility of saving on administration fees.
Considering the small amount of capital, one could argue that it would make more sense to withdraw the capital, if possible, instead of trying to grow it.
The amount you can commute, or fully withdraw from your living annuity, depends on whether at retirement you took a cash lump sum from the retirement fund from which the living annuity originated.
If you took a cash lump sum, you can commute if the value of the living annuity is below R50 000. If you did not take a lump sum, you can commute if the value is below R75 000.
If you did take a lump sum, you could, at your next income review, increase the annual drawdown to the maximum of 17.5 percent in order to reduce the value of the living annuity to less than R50 000.
Based on the current value of R60 000, the income will be R10 500, which will be fully taxable in your hands.
The capital paid out as a result of the commutation will be taxed as a lump sum, with the tax calculated in terms of the retirement fund lump-sum benefits or severance benefits table and subject to any previous lump sums you have taken. It is therefore important to obtain tax advice from an adviser who has the Certified Financial Planner accreditation before making any decisions.
SEEKING AN ALTERNATIVE TO EQUITIES
I have a portfolio of just over R800 000 in about 11 or 12 shares, as well as 250 MTNZakhele shares worth about R18 000. I have a unit trust fund that is worth about R650 000, and my pension is worth R400 000. I would like to start investing in something other than equities. Property is out of reach, because I would need a large deposit. What other options do I have? I have about R40 000 to start with. I am 41 years old and work as a technician. Name withheld
Jaco Joubert, a financial adviser at PSG Wealth in Sandton, responds: Many different factors, such as your investment time horizon, your investment goal and your financial needs, have been assumed in answering your question. You need to develop an investment plan in consultation with a financial adviser.
Your current investments are mainly in equities, either via shares or a unit trust fund. A large portion of your pension fund is invested in equities. This allocation is not necessarily wrong, and you are invested in the asset class that can beat inflation over the long term.
You could consider ensuring that your equity allocation has good offshore exposure, either through the companies’ business operations or by investing directly in offshore equities.
You could consider investing in other asset classes, such as cash, which has the lowest risk, but provides the lowest returns over time. Although you can invest in cash instruments that have guaranteed rates, cash is really suitable for funding short-term needs and for providing diversification. Over the long term, cash will not out-perform inflation.
The asset class most likely to complement your investment portfolio is property unit trusts (also known as Reits – real estate investment trusts). The underlying investments are in commercial property, such as offices, shopping centres and hotels. This is a medium- to high-risk asset class, with returns proportionate to this level of risk.
Because the property market is generally adversely affected by rises in interest rates, property unit trusts tend to have a low correlation to interest-bearing investments, particularly cash.
You can buy unit trusts that invest in the local and offshore property markets. A combination would be a great enhancement to your portfolio.
HOW BAD WOULD A WITHDRAWAL BE?
I’m planning to change jobs by the end of this year and I want to make the most of the retirement savings I have accumulated in my company’s pension fund. I am in my late twenties and wonder what the implications would be if I were to use that money? Name withheld
Magdeleen Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: It’s common, particularly for younger individuals, to withdraw a retirement benefit as a cash lump sum when changing jobs. But this will affect your ability to provide an income in retirement in two ways.
First, your retirement savings will be reduced, if not depleted. People who take a cash withdrawal often promise themselves that they will replace the savings they withdrew. However, in my experience, very few stay true to this undertaking. They always think they have more time than they do.
Second, although most people are aware that lump sums taken before retirement will be taxed, they tend to underestimate the severity of the tax rates. The rates for pre-retirement lump-sum withdrawals are:
• R0 to R25 000: no tax;
• R25 001 to R660 000: 18 percent of taxable income above R25 000;
• R660 001 to R990 000: R114 300 plus 27 percent of taxable income above R660 000; and
• R990 001 and above: R203 400 plus 36 percent of taxable income above R990 000.
The rates for lump-sum withdrawals at retirement are far less punitive:
• R0 to R500 000: no tax;
• R500 001 to R700 000: 18 percent of taxable income above R500 000;
• R700 001 to R1 050 000: R36 000 plus 27 percent of taxable income above R700 000; and
• R1 050 001 and above: R130 500 plus 36 percent of taxable income above R1 050 000.
Although I cannot prescribe what you should do, I would advise you to think very carefully about the implications of what you decide.
HOW IS A MATURE RA TAXED?
Are the returns on a matured retirement annuity (RA) tax-free? Mavis Jones
Wico Strydom, a financial adviser at PSG Wealth Silverlakes, Pretoria, responds: When your RA matures after age 55, you are allowed to withdraw up to one-third of your benefit as cash. The withdrawal will be taxed according to the rates in the answer above – that is, the first R500 000 will be tax-free. Any previous withdrawals from an RA, pension or provident fund will be taken into account when calculating the tax-free amount. You must use the balance to buy a pension, which will be taxed at your marginal rate of tax.