Be wary of financial advice peddled by well-meaning journalists

Gavin Came, chair of the Financial Planning Executive Committee at the Financial Intermediaries Association of Southern Africa (FIA)

Robert Laing’s opinion column published on bdlive.co.za (Business Day) on 20 August 2015 refers. His musings under the heading “Do not trust all the advice given by professionals” quickly disintegrate into an attack on the so-called insurance salesman. Aside from the piece being an unwarranted attack on the advice profession it contains a number of inaccuracies.

Laing states that there is a “common problem with the number of people getting sold retirement annuities (RAs) despite working in corporate jobs where their employers are deducting the maximum allowable ‘salary sacrifice’ for their pension funds.” He quickly adds that by his understanding of the tax laws these individuals are “volunteering for double taxation” by signing up for said RAs. 

What a pity Laing did not discuss the topic with a financial adviser before publishing his views. Gavin Came, chair of the Financial Planning Executive Committee at the Financial Intermediaries Association of Southern Africa (FIA) observes that financial planners are acutely aware of the constraints on deductibility that being a member of both pension fund and RA present. 

“Mr. Laing is however incorrect when he states that savers are ‘volunteering for double taxation’ by signing up for RAs in circumstances where they are also contributing to a pension or provident fund,” says Came. This is because the saver may carry the disallowed deduction on an RA forward, year-after-year, until his or her ultimate retirement. 

Came explains: “When the saver withdraws his or her lump sum upon retirement the rolled forward disallowed deduction is added to the tax free amount available to him or her. And in the event the saver does not draw a lump sum he or she may continue to deduct the disallowed contributions from the annual pension until the disallowed deductions are worked off.” The saver does not lose the tax benefit of these RA contributions, ever! 

RAs have other benefits too. A saver’s invested funds (whether deductible in the current year or at retirement) are exempt from income tax, dividends tax and capital gains tax and estate duty. “Should an investor, deliberately or in error, contribute in excess of the allowed deduction, that part of his contribution is no worse than the un-deductible contribution to a tax free savings account (TSFA), with the added advantage of being able to deduct it in the future,” says Came. 

“Mr. Laing’s column is a huge advertisement for professional advice because savers who make unassisted decisions regarding investments, retirement and taxation are often unaware of the complexity and long term consequences of their decisions.” 

The FIA’s advice to consumers is for them to approach a financial advice professional (financial planner, financial adviser or tax practitioner) to assist them in extracting the maximum benefit from their salaries and savings. Savers should also appreciate the value that they receive from their financial advice professional in return for the fee or commission paid. “To suggest – as Mr. Laing does – that financial advisers are flogging RAs because sales commissions are so juicy borders on libel,” says Came. 

Laing also erred in his assumption regarding adviser-charging in the TSFA space. He said that the products were condemned to the DIY-investor realm due to there being no sales commission system to be earned by advisers getting people to sign up for TFSAs. Wrong! 

“Compensation has been on offer to financial advisers since the introduction of TFSAs in that they can receive a fee stated as a percentage of the funds under management in their clients’ TFSA account,” says Came. 

He adds that financial advisers would not automatically recommend TFSAs because – at least in these early days – there is no real benefit offered by the TFSA over an RA. “If one compares the benefits of a TFSA to an RA one has to look at the derisory amount available to put away in a TFSA as well as the penalties for exceeding it,” he says. 

A saver who invests R30, 000 in a cash-based TFSA can earn 6% per annum (or R1800), an amount that is far less than the R23, 800 tax-exempt interest accrual allowed in current tax year. “The balance in a cash-based TFSA would have to exceed R476, 000 before it was worthwhile implementing,” says Came. 

“Correctly the writer states that one would need to invest in growth assets where the bulk of the growth would be capital gains – and here again the TFSA falls short because the annual exemption from capital gains tax is currently R30, 000.” 

Assuming the client’s growth assets achieved a 15% annual return the benefit of a TFSA would only kick in if he or she had around R200, 000 invested in it. What should savers do? Came suggests that they consider the following basic steps with help from a professional financial planner. 

Step 1: Maximise your contributions to a RA where you benefit from the same tax free status enjoyed under a TFSA as well as a tax deduction for your contribution. (The growth within the RA fund is not restricted and neither are the contributions, unlike the case in a TFSA). 

Step 2: Once you have an optimised RA strategy in place you should focus on building up a personal investment portfolio to the extent that you ‘use up’ your annual CGT and interest exemptions. 

Step 3: Once you are happy with the first two steps you might consider a TFSA, though by this stage the TSFA is too trivial to be of interest to most investors. 

Savers must consider their unique requirements when choosing their underlying investments. “Financial planners can assist by matching investments to their client’s needs with due consideration for the risk and return equation – it is very poor advice to suggest that they invest in index funds (low cost funds that utilise passive fund management techniques) in all cases," concludes Came.