WEBVTT 1 00:00:00.380 --> 00:00:04.521 You're listening to Strictly Business Podcast with Lindsay Williams. 2 00:00:05.982 --> 00:00:11.123 With me today is Mark Lindley, Product Specialist, 91 Investment Platform in Cape 3 00:00:11.123 --> 00:00:11.303 Town. 4 00:00:11.523 --> 00:00:13.304 We're going to talk about burning issues. 5 00:00:13.344 --> 00:00:15.304 And first of all, Mark, welcome. 6 00:00:15.444 --> 00:00:19.205 And secondly, welcome to the first installment of Advisor Pulse, 7 00:00:19.545 --> 00:00:25.107 in which we'll bring insights from 91 experts to help make financial 8 00:00:25.107 --> 00:00:27.107 advisors'lives easier. 9 00:00:27.107 --> 00:00:30.449 And from recent conversations, Mark and his team have had with various wealth 10 00:00:30.449 --> 00:00:32.449 managers. 11 00:00:32.449 --> 00:00:37.192 They've compiled a list of the top 10 things that keep investors, especially 12 00:00:37.192 --> 00:00:39.192 older investors with foreign assets, 13 00:00:39.192 --> 00:00:41.192 awake at night. 14 00:00:41.192 --> 00:00:42.214 We're not going to get through all 10, but let's address a few of them. 15 00:00:42.574 --> 00:00:45.215 And Mark, we need to make some people sleep better at night. 16 00:00:45.235 --> 00:00:46.576 Can we start with this first one? 17 00:00:46.856 --> 00:00:51.538 What are the most tax efficient solutions for the lazy cash in the bank account? 18 00:00:53.118 --> 00:00:55.459 Hi, Lindsay, thank you for having me first and foremost. 19 00:00:56.340 --> 00:00:57.300 Absolutely, this is a... 20 00:00:57.420 --> 00:01:01.141 big problem that's facing a lot of people here in South Africa at the moment. 21 00:01:01.541 --> 00:01:02.741 If you look at the stats, 22 00:01:02.761 --> 00:01:08.963 there's around 1.7 trillion rand of that lazy cash that's sitting in household 23 00:01:09.183 --> 00:01:10.484 deposits at the moment. 24 00:01:10.504 --> 00:01:13.784 So not all of that is what we would class as lazy cash. 25 00:01:13.924 --> 00:01:19.526 But when we refer to that, what we're talking about is the excess money that's 26 00:01:19.526 --> 00:01:21.526 sitting in people's bank 27 00:01:21.526 --> 00:01:26.188 accounts that they're not living off month to month and that could potentially be 28 00:01:26.188 --> 00:01:28.188 earning more money elsewhere. 29 00:01:28.188 --> 00:01:28.709 I think you've got a couple of issues. 30 00:01:28.769 --> 00:01:31.530 People have been scared of investing in the markets recently, 31 00:01:32.410 --> 00:01:39.313 but also since the Ukraine-Russia crisis and the inflation issues that materialized 32 00:01:39.313 --> 00:01:41.313 around 33 00:01:41.313 --> 00:01:44.495 the time, central banks around the world have been increasing interest rates, 34 00:01:44.555 --> 00:01:48.097 which has meant that the return on cash has been a lot more attractive. 35 00:01:48.697 --> 00:01:55.680 But when you look at the sort of investments that people hold, cash is not 36 00:01:55.680 --> 00:01:57.680 the most tax efficient because whatever growth you do, you're not going to be able 37 00:01:57.680 --> 00:01:59.680 to make a lot of money. 38 00:01:59.680 --> 00:02:01.680 get is subject to fairly small exemptions. 39 00:02:01.680 --> 00:02:01.785 So if I'm below the age of 65, which I am, 40 00:02:02.506 --> 00:02:08.891 my first 23,800 Rand of interest that I receive in the bank will be free of tax. 41 00:02:08.991 --> 00:02:12.173 And then anything over and above that will be taxed at my marginal rate. 42 00:02:12.374 --> 00:02:14.295 So for many of the clients that we deal with, 43 00:02:14.655 --> 00:02:20.020 that means that 45% of the growth above that will be subject to tax. 44 00:02:20.780 --> 00:02:25.124 So maybe if I can just put that into perspective, if you go back to the 2021... 45 00:02:25.344 --> 00:02:31.826 to 2022 tax year, a person below the age of 65, if you assume that they were 46 00:02:31.826 --> 00:02:33.826 earning the repo rates, 47 00:02:33.826 --> 00:02:39.688 could have around 634,000 rand in cash before they would pay any interest on 48 00:02:39.688 --> 00:02:40.008 that. 49 00:02:40.008 --> 00:02:46.150 But since rates have gone up in the most recent tax year, that's now dropped to 50 00:02:46.150 --> 00:02:48.150 below 300,000 rand. 51 00:02:48.150 --> 00:02:52.452 So people are suddenly realising that they're paying a lot more tax on this 52 00:02:52.452 --> 00:02:54.452 money than they have been in the past. 53 00:02:54.452 --> 00:02:56.270 So that's really the problem, I guess, that we're trying to deal with here. 54 00:02:56.510 --> 00:02:58.031 Okay, so there's two different types of cash. 55 00:02:58.091 --> 00:03:02.393 There's the cash that isn't lazy and the cash that should be working for you. 56 00:03:02.413 --> 00:03:05.275 In other words, turn lazy into working for you. 57 00:03:05.595 --> 00:03:10.378 And obviously, your advisor will tell you how to do that, as you've just so well 58 00:03:10.378 --> 00:03:10.397 explained. 59 00:03:11.638 --> 00:03:12.338 Correct, yeah. 60 00:03:12.399 --> 00:03:17.081 So I guess we would always say use those exemptions available to you. 61 00:03:17.501 --> 00:03:23.721 So, you know, even if the amount you have in your bank account is more than you 62 00:03:23.721 --> 00:03:25.721 need, to pay your expenses every month, 63 00:03:25.721 --> 00:03:27.825 then it does still make sense to carry a certain amount of cash, 64 00:03:28.285 --> 00:03:32.368 just to make sure that you're utilising that exemption that I've just mentioned. 65 00:03:32.388 --> 00:03:37.753 And that amount is £34,500 for anyone above the age of 65. 66 00:03:37.753 --> 00:03:40.195 So you do get more relief as you get older. 67 00:03:40.835 --> 00:03:46.480 But then the question is, well, what do you do with that excess cash that sits 68 00:03:46.480 --> 00:03:48.480 over and above that amount? 69 00:03:48.480 --> 00:03:52.564 So you may well have heard of a concept of a what's a policy wrapper, 70 00:03:52.724 --> 00:03:55.205 so either an endowment or a sinking fund. 71 00:03:56.185 --> 00:04:03.147 And they are life company administered products that provide various tax and 72 00:04:03.147 --> 00:04:05.147 estate planning benefits. 73 00:04:05.147 --> 00:04:10.249 So if I'm a higher rate taxpayer, and my marginal tax rate is 45%, by utilizing 74 00:04:10.249 --> 00:04:12.249 that policy wrapper, 75 00:04:12.249 --> 00:04:13.030 and even if I just continue to hold money markets, 76 00:04:13.050 --> 00:04:18.171 so I don't need to increase my risk above cash in order to improve my outcome. 77 00:04:18.571 --> 00:04:20.272 But now the the yield 78 00:04:20.512 --> 00:04:27.377 on that cash is getting taxed at 30% within the policy rather than 45% in my 79 00:04:27.377 --> 00:04:29.377 own hands. 80 00:04:29.377 --> 00:04:34.402 And that tax arbitrage opportunity creates a massive compounding benefit over an 81 00:04:34.402 --> 00:04:36.402 extended period 82 00:04:36.402 --> 00:04:38.402 of time. 83 00:04:38.402 --> 00:04:39.806 Plus now, these investments are being held effectively by a life company, 84 00:04:40.246 --> 00:04:46.871 which reduces the volume of assets that I have in my own hands and can reduce the 85 00:04:46.871 --> 00:04:48.871 amount of tax that I'm paying elsewhere. 86 00:04:48.871 --> 00:04:54.420 Okay, if I thought cash was fairly complicated, trusts are even more 87 00:04:54.420 --> 00:04:56.420 complicated, because over the years that I've been broadcasting, 88 00:04:56.420 --> 00:04:59.504 Mark, trusts and the rules around trusts seem to change all the time. 89 00:04:59.604 --> 00:05:05.048 This is the second question now, the second burning issue, the second keep you 90 00:05:05.048 --> 00:05:07.048 awake at night situation. 91 00:05:07.048 --> 00:05:10.972 Trusts were a popular way, it says here, to protect assets for the next generation, 92 00:05:10.972 --> 00:05:12.972 but since the introduction of Section 93 00:05:12.972 --> 00:05:15.315 7C of the Income Tax Act, it has become a challenge to... 94 00:05:15.655 --> 00:05:21.879 transfer both local and foreign assets to trusts without incurring punitive taxes. 95 00:05:21.959 --> 00:05:25.702 So we've got to go to Section 7C. Please explain. 96 00:05:26.883 --> 00:05:27.583 Yes, correct. 97 00:05:27.583 --> 00:05:29.665 So I'll just recap what you said there, 98 00:05:29.685 --> 00:05:34.708 because trusts are ultimately designed for succession planning purposes. 99 00:05:34.768 --> 00:05:38.871 So it's a way in which, you know, they've existed for a very long period of time. 100 00:05:39.251 --> 00:05:44.515 And it's a way in which someone's legacy can sort of continue for the benefit of 101 00:05:44.515 --> 00:05:46.515 their family. 102 00:05:46.515 --> 00:05:48.515 after their death. 103 00:05:48.515 --> 00:05:53.516 But what has happened is there's been various sort of tax and estate planning 104 00:05:53.516 --> 00:05:55.516 benefits that have come and gone over time. 105 00:05:55.516 --> 00:06:00.620 And I think when SARS kind of cottoned on to the fact that people were using them 106 00:06:00.620 --> 00:06:02.620 more for tax planning purposes 107 00:06:02.620 --> 00:06:06.643 than for succession planning purposes, they've targeted them more aggressively in 108 00:06:06.643 --> 00:06:08.643 recent years. 109 00:06:08.643 --> 00:06:11.946 So before we even get to 7C, if you look at the rates of income that a trust pays, 110 00:06:12.006 --> 00:06:14.087 income tax is at 45%. 111 00:06:14.087 --> 00:06:16.265 And And then if you're in growth assets, 112 00:06:16.325 --> 00:06:21.829 then 80% of any gain you experience will be the tax at that same 45% rate. 113 00:06:21.829 --> 00:06:27.954 So that means 36% effective capital gains tax paid by the trust. 114 00:06:28.975 --> 00:06:35.380 But then SARS have even gone a step further by introducing 7C of the Income 115 00:06:35.380 --> 00:06:37.380 Tax Act in recent years. 116 00:06:37.380 --> 00:06:39.380 But to break down what that means. 117 00:06:39.380 --> 00:06:43.227 So first of all, if I'm going to create a trust for the benefit of my family, 118 00:06:43.427 --> 00:06:46.350 I have to fund that trust in some way. 119 00:06:47.411 --> 00:06:51.694 You can either do that by way of donation, but that can have some negative 120 00:06:51.694 --> 00:06:53.694 consequences to it. 121 00:06:53.694 --> 00:06:57.159 Or the more popular way of doing that is actually to loan the money to the trust. 122 00:06:57.599 --> 00:07:04.165 And what 7C did was that a lot of people in the past had funded those trusts via 123 00:07:04.305 --> 00:07:05.566 interest-free loans. 124 00:07:06.307 --> 00:07:08.929 And SARS wanted to eliminate that practice. 125 00:07:08.929 --> 00:07:10.611 And that's where 7C came in. 126 00:07:11.055 --> 00:07:15.916 So now you have to pay interest on that loan at a market-related rate. 127 00:07:16.817 --> 00:07:22.298 And the income that you would have received then creates a tax liability in 128 00:07:22.298 --> 00:07:24.298 your own hands. 129 00:07:24.298 --> 00:07:25.079 So for local investments, that's been quite problematic. 130 00:07:25.719 --> 00:07:29.441 But for offshore trusts, this has become more of a problem in recent years. 131 00:07:29.541 --> 00:07:34.682 Because if you think about the interest rate environment post the financial 132 00:07:34.682 --> 00:07:36.682 crisis, 133 00:07:36.682 --> 00:07:37.503 interest rates have been incredibly low. 134 00:07:38.063 --> 00:07:41.265 in developed worlds especially, for a very long period of time. 135 00:07:41.945 --> 00:07:44.727 And then what's happened is in recent years, 136 00:07:45.547 --> 00:07:51.590 since central banks have been tackling that same inflation problem that I talked 137 00:07:51.590 --> 00:07:53.590 about earlier, now rates have gone up. 138 00:07:53.590 --> 00:07:58.014 So, if I was funding an offshore trust and the rate of interest was close to zero at 139 00:07:58.014 --> 00:07:58.434 that 140 00:07:58.434 --> 00:07:58.874 point in time, 141 00:07:59.234 --> 00:08:06.018 what SARS require for these agreements is to add a 1% spread over whatever the 12% 142 00:08:06.018 --> 00:08:08.018 LIBOR rate 143 00:08:08.018 --> 00:08:10.018 is in that particular area. 144 00:08:10.018 --> 00:08:12.018 country. 145 00:08:12.018 --> 00:08:14.829 So the amount of tax that was being paid for the benefit that was being received 146 00:08:14.829 --> 00:08:16.829 was relatively low. 147 00:08:16.829 --> 00:08:18.050 But in a higher rate interest rate environment, 148 00:08:18.930 --> 00:08:22.651 now the amount of interest that's being paid is significantly higher. 149 00:08:23.091 --> 00:08:28.232 And subsequently with that, the amount of tax that's being paid is also a lot 150 00:08:28.232 --> 00:08:28.372 higher. 151 00:08:28.533 --> 00:08:35.294 And now people who have these arrangements in place are considering whether it is the 152 00:08:35.294 --> 00:08:37.294 most effective solution for them going forwards. 153 00:08:37.294 --> 00:08:39.294 Seems to me... 154 00:08:39.294 --> 00:08:42.038 Mark, as an aside, that the whole trust environment is a very dynamic one. 155 00:08:42.058 --> 00:08:48.121 And it depends on the fortunes of the Republic of South Africa as to whether, 156 00:08:48.121 --> 00:08:50.121 you know, 157 00:08:50.121 --> 00:08:52.121 they change the rules. 158 00:08:52.121 --> 00:08:52.764 When I say they, I mean the financial authorities. 159 00:08:52.764 --> 00:08:57.346 And you have to keep on your toes and keep in touch with your advisors in order to 160 00:08:57.346 --> 00:08:57.426 keep up. 161 00:08:58.547 --> 00:08:59.247 You do. 162 00:08:59.247 --> 00:08:59.687 Correct. 163 00:08:59.687 --> 00:09:01.128 That's 100% correct. 164 00:09:01.188 --> 00:09:03.790 So these rules are changing all the time. 165 00:09:03.790 --> 00:09:05.551 Of course, we can only plan within the 166 00:09:05.811 --> 00:09:11.196 parameters that are allowed by legislation at any particular point in time. 167 00:09:11.576 --> 00:09:18.061 But I guess the thing is that if people are using these vehicles for their 168 00:09:18.061 --> 00:09:20.061 intended 169 00:09:20.061 --> 00:09:25.107 purpose, then I think the receiver will be fairly, well, 170 00:09:25.127 --> 00:09:27.989 they'll be fair in terms of the way they deal with them. 171 00:09:28.050 --> 00:09:34.495 But if they feel some of those benefits are maybe being abused, then I think 172 00:09:34.495 --> 00:09:36.495 that's where the changes in legislation come in. 173 00:09:36.495 --> 00:09:39.913 Right, we've answered two questions of the 10 that were identified, as I said in my 174 00:09:39.913 --> 00:09:41.913 introduction. 175 00:09:41.913 --> 00:09:44.895 And there's one word that came in, number one and number two, and it's tax. 176 00:09:45.195 --> 00:09:48.596 And I think we've got a little bit of time for a third question now. 177 00:09:48.596 --> 00:09:49.736 And tax again comes in. 178 00:09:50.136 --> 00:09:52.037 We may have time for this last question. 179 00:09:53.318 --> 00:09:59.220 So I want to ask you, how do I ensure a tax efficient income for myself in 180 00:09:59.220 --> 00:10:01.220 retirement? 181 00:10:01.220 --> 00:10:03.220 So important. 182 00:10:03.220 --> 00:10:05.220 Yes, definitely. 183 00:10:05.220 --> 00:10:09.915 The process of retirement starts a long time before the actual D-day, 184 00:10:10.455 --> 00:10:16.740 where you work your last day for your employer and then you convert whatever 185 00:10:16.740 --> 00:10:18.740 retirement savings you've 186 00:10:18.740 --> 00:10:23.605 accumulated into a post-retirement product and start drawing an income from 187 00:10:23.665 --> 00:10:24.365 it. 188 00:10:24.365 --> 00:10:27.908 So, I think the first thing is obviously ensuring that you've saved sufficiently. 189 00:10:28.320 --> 00:10:34.942 to provide for that income before we even get to tax we need to ensure that the 190 00:10:34.942 --> 00:10:36.942 amount you're able to withdraw is sufficient to 191 00:10:36.942 --> 00:10:42.024 to fund your needs in retirement and then i think really it comes down to well what 192 00:10:42.024 --> 00:10:44.024 vehicles did you save that 193 00:10:44.024 --> 00:10:46.024 money into and 194 00:10:46.024 --> 00:10:50.106 again coming back to the point that i raised earlier about using exemptions that 195 00:10:50.106 --> 00:10:52.106 are available 196 00:10:52.106 --> 00:10:57.628 first and foremost so that money can be taken out of those solutions without 197 00:10:57.628 --> 00:10:59.628 negative tax consequences 198 00:10:59.628 --> 00:11:04.720 But then also using things like tax-free savings accounts in combination with your 199 00:11:04.720 --> 00:11:06.720 pension or provident 200 00:11:06.720 --> 00:11:11.583 fund that you've accumulated or your RA, using things like the sinking funds or 201 00:11:11.583 --> 00:11:13.583 endowments that I mentioned, 202 00:11:13.583 --> 00:11:18.627 where the tax that you draw from that can be at a lower rate than in your own hands. 203 00:11:18.767 --> 00:11:25.151 So I think the key is really using all of those different products in combination 204 00:11:25.151 --> 00:11:27.151 with one another 205 00:11:27.151 --> 00:11:27.452 and then optimizing. 206 00:11:28.100 --> 00:11:30.222 what you draw from and when. 207 00:11:30.962 --> 00:11:36.946 Because your benefit of your retirement products are that when you made the 208 00:11:36.946 --> 00:11:38.946 contributions to them, 209 00:11:38.946 --> 00:11:39.288 you got a deduction at the time. 210 00:11:39.388 --> 00:11:43.070 So it was pre-tax money that you were typically investing. 211 00:11:43.610 --> 00:11:50.555 Whereas with your tax-free savings accounts or your sinking funds or 212 00:11:50.615 --> 00:11:55.699 endowments, that's post-tax money that you're allocating. 213 00:11:55.879 --> 00:11:57.660 So you didn't get a benefit on the way in. 214 00:11:57.860 --> 00:12:03.942 But maybe the tax on withdrawal is less than your withdrawals from your retirement 215 00:12:03.942 --> 00:12:05.942 products, 216 00:12:05.942 --> 00:12:09.065 where you will get taxed as per the PAYE tables on anything that you draw from it. 217 00:12:10.365 --> 00:12:11.446 Very well explained, Mark. 218 00:12:11.486 --> 00:12:12.186 Thank you very much. 219 00:12:12.186 --> 00:12:17.328 And I'm sure we're going to speak again in the future because we only took care of 220 00:12:17.328 --> 00:12:19.328 three of the 10 burning questions. 221 00:12:19.328 --> 00:12:22.550 And we'll be sure to address some more of these burning questions in our next 222 00:12:22.550 --> 00:12:24.550 Advisor 223 00:12:24.550 --> 00:12:26.992 Pulse. Mark Lindley is Product Specialist at 91 Investment Platform. 224 00:12:27.392 --> 00:12:29.333 in Cape Town, and that was Advisor Pulse. 225 00:12:30.434 --> 00:12:37.379 The views and opinions expressed in these podcasts are those of Lindsay Williams and 226 00:12:37.379 --> 00:12:39.379 various contributors and do not reflect the policy, 227 00:12:39.379 --> 00:12:41.902 position, or opinion of any other agency, organisation, employer, 228 00:12:42.242 --> 00:12:46.085 or company associated with StrictlyBusinessPodcast.com. 229 00:12:46.565 --> 00:12:53.530 Assumptions made on the analyses are not reflective of the position of any other 230 00:12:53.530 --> 00:12:55.530 entity other than the speaker or the author. 231 00:12:55.530 --> 00:12:58.998 And since we are critically thinking human beings, These views are always subject to 232 00:12:58.998 --> 00:12:59.096 change, 233 00:12:59.279 --> 00:13:01.845 revision and rethinking at any time. 234 00:13:02.146 --> 00:13:04.572 Please do not hold us to them in perpetuity.