Tax planning and RA's

[saash]

Does anyone out there think that an RA is an effective investment for retirement purposes. I'm looking to lower my tax base, and thinking maybe of investing in an RA for the tax deduction - is this maybe something I regret eventually?

[#2]

tax deduction yes, long term prospects, well lets say you should have money for bread and milk.....

[#3]

besides its a farce, deferring your tax (lower tax rate now) cause your investment will grow over the years and be subject to higher tax base later on, if you take a lump sum when you retire to do whatever and then you left with even less to live off of. Good way of forced savings and in certain companies it is mandatory. Rather do your own investment planning and if you have to use the tax deduction so be it but invest your post tax income wisely and you will outperform most RA's...IMO, my parents learnt the hard old fashioned way.

[saash]

is anyone on the forum retired?

[klapka]

I'm retired - though I still work - trading. I am very grateful I took out RAs a long time ago. I have matured some and some still going. Apart from the advantage of the tax deductability of the contributions, the forced saving built up to a useful nest egg. Endowments, unit trusts and even shares got sold off whenever there was a crisis or temptation. You cannot touch an RA until you are 55 and if you run a business they are essential because neither can your creditors. OMHO

[SimonPB]

bread and milk .. or .. bread or milk ??

[#7]

I would say they play a more necessary role if you don't contribute to a pension/provident fund through your job as the tax breaks are higher and the need is more as retirement planning falls soley on oneself. If you are switched on about investing/trading etc then there are indeed better ways to go about retirement planning but for your average person a compulsory investment into an RA is in their best interests but shouldn't be seen as the be all and end all of retirement planning and other methods such as a long term equity investment portfolio are still important if you want to retire happily. I am a financial advisor/planner, what ever they call us these days, and the majority of people I have dealt with so far don't think about such things untill it is too late! RA's need long investment terms to get the maximum value out of them. What ever you do, start as early as possible.

[#8]

Gash, Thanks for advising your status, I was gonna say "we can see who the finance planner is here" ;-).... agreed they are excellent for tax breaks and forced savings but do they really perform? Klapka, you say you are retired and grateful for the forced saving habit etc. Honestly can you live off the RA alone or did you have to suppliment it and how long had you held it for?

I am not advocating you do not do RA but you have to balance your needs and whatever you think is required for an RA you can double (no additional tax break but at least you will save more) if you not into working for a retirement plan.

[DEP]

Yes, RA is good way to invest for retirement. However, it should form part of a greater portfolio (RA; Shares; Unit trusts etc. I contribute to 2xRA, whoever, it only 15% of my monthly recurring investment.

[#10]

Weather they perform or not depends on the fund some one like myself sticks the RA into. Often the advisor knows diddly squat about investments and the fund selected is not optimal and performs poorly in terms of what the client needs. But at the end of the day the agruement of performance (or lack there of) rolls around to the managed investment fund approach (Allan Gray, Coronation etc) vs our own index investing or stock picking etc.

[#11]

Weather they perform or not depends on the fund some one like myself sticks the RA into. - now thats the most truthful statement a financial planner has ever said to me ...heheheh

"Often the advisor knows diddly squat about investments and the fund selected is not optimal and performs poorly in terms of what the client needs." - That is the second most honest thing a planner has ever said ..hehehe

Well the question always asked, and unfortunately only long after the damage was done, is was the placement of funds for the comm eared or because it was the best product under the circumstances. I am not knocking the industry or you (you seem to have an open transparent manner rare with a FP) but I have come across to many sales people (brokers etc if you wanna call them that) that like you say know diddly about investment and frankly could not care as long as they earn the higher comm offered that month on that product.

[klapka]

As an 'average person' I was simply answering the original question. An RA is a good investment for the reasons given. No it is not the only tool and should be part of a balance of savings vehicles. In reality over 90% of South Africans cannot afford to 'retire' because they do sweet Fanny Adams when they are younger. I retired comfortably at 55. Incidentally most people even advisers do not realise that whatever you contribute that is non deductible, is then deductible at maturity instead.

[#13]

deductable at maturity...now that is really interesting good to know (I did not know that). Like I said above you have to at least double what you are advised to put in (if you want to do little else for retirement planning) if you want this to work in your favour. So the extra payments are accounted for later thus essentially lowering the tax rate in future....now this starts looking a little more like an investment for the public..... if only you can convince them to pay the extra every month with no immediate benefit.... But I like the sounds of it. At least I now know I will get additional benefit other than having a retirement nest egg.

[#14]

Haha why thank you, and the spelling of weather was to sus out who the english teacher on the forum is! The industry does have a bad name and its not hard to see why, which is tough for someone relitively new to the industry like me who isn't sales orientated (not only because I dont have the savvy sales skills of your typical broker but also as I don't believe the industry should work like it does)and the majority of planners out out chasing comm. Peolpe must just be careful and not put all their financial hopes in one 'salesman'!

[saash]

Well see now that's the other side of the coin - the fees are pretty high (though I still need to see what my finP comes up with when I chat to him again).... taking that into consideration, what I save on tax actually goes to the fees - so where's the saving, actually? Then, there's the truth that the performance is rarely mind-blowing, in which case I may as well just keep a few rolling over endowments which can earn compound interest, I think it will be better planning really. I currently have an offshore endowment, which is 10 years on now - but still its performing lower than if it were just a fixed dep rolling over annually at the same escalation net of tax on the interest portion. I know the market took a pounding, but over the 10 yr period I should be seeing at least marginal growth and I'm not. Will assess this little vehicle at the end of 2010 again and see what happens - I put into a medium risk Europe-stocks portfolio - and I suppose the strength in the rand currently doesn't help that choice along any. Where do you get this idea that the non-deductible contributions are deductable at maturity? I know that there is an exemption off the first R300 000 of any RA or Pension - but I've not seen anything about additional contributions being deductable later, though I suppose if I pay tax on the contribution now, I can't pay tax on it again when I pull it out as that would amount to double-tax, but that excemption is not effectively a "tax break" the break really only comes in on the deductible contribution portion, as that would be taxed ordinarily at say 40% if I just pop that money in the bank now - then when we draw it out as a monthly income we'd aim toward pulling it down at an annual rate below the tax threashold, whereby we never actually pay tax on that portion at all in our life-time!

[saash]

CPS - how do you make spaces between your thread posts?

[#17]

Now you starting to get into estate planning when you try structure the tax efficiently in "your life time", you will pay that tax somewhere some how. Either in life or in death but pay you will. There are only two guarantees in life, death and taxes.....hehehe

[#18]

There are no income tax or CGT payable within a RA so if u use a unitised instrument like unit trust and you do portfolio switches over the years "wisely" you will outperform most other investments that are taxable if you fiddle with it or change it. Conclusion, most people that do not think that an RA is a good instrument is ppl that do not understand an RA and what u can do with it. ps you are suppose to pay the tax saving on an RA back into the RA as an adhoc to be able to c the real benefit at the end.

[saash]

Well - are there any efficient estate planning vehicles to achieve the desired result? The aim here is NOT to defer tax, but to avoid it entirely - lol. No, not "evade" it, either! In my ideal world, I can utilise my full retirement funding income deductions, as well as my full non-retirement funding income deductions. This will ALSO have the added effect of reducing my tax base :-) when I retire I'll get a R300k lump-sum draw-down tax free and re-invest it. Then, the interest on that remains exempt as it is under the tax deductable allowance for interest, and I can draw a monthly salary on the balance that falls below the threashold - I can live off that and not pay any tax at all. All the savings can hopefully be completely used up by the time I die .... in my perfect world scenario - where's the tax? (and don't come to me with the VAT - that's a double-tax that we all just haveto live with!)

[#20]

The fees are regulated but the planner can structure the fee structure differently and doesn't necessarily have to take the full fees (but he usually will). For a R1000 RA with an initial term of 12 years (someone who is around 30) the fees to the planner would be around R2500 upfront and R25 every month when a premium is paid...