By now you must be quite familiar with the facts surrounding the tax-free Savings Accounts (TFSA) which took effect on March 1, so I am not going to review the basics but rather consider the product from a financial planning and client engagement perspective.
I strongly believe that a TFSA is something that should be considered in your conversations with clients because there are undeniable benefits to investing in the product.
Categorising your client base
Treasury launched the TFSA to encourage long-term savings, particularly for middle income earners. Ultimately, your conversations with clients of different income levels and wealth positions will vary and you will have to consider your own position as an adviser on the matter.
Your more affluent clients will most likely invest R30 000 every year as a lump sum and your less cash flow positive clients will invest up to R2 500 a month. The product can be sold on Linked Investment Savings Accounts and Life licenses. Both have their benefits, but a cost comparison will need be conducted. They are both flexible, but bear in mind that once money is withdrawn, you cannot replace it and receive the same benefit again. Only new money, under the same annual limits will be considered and growth on anything in excess will be taxed at 40%.
Understanding the rules
Through a life license, you can add beneficiaries to the contract which has estate planning benefits. There may also be protection from creditors, but check with your provider in this regard to properly understand the product rules.
A family can make use of a TFSA by investing in their children’s names, in addition to their own, and earmarking their investments for education. Grandparents can adopt a similar strategy and provide a legacy to anyone they please.
TFSA versus retirement products
As a long-term savings strategy with tax benefits, questions have been raised as to whether the TFSA is in competition with retirement products. The tax treatment positions the product well for retirement planning, but its annual and lifetime cap simply limits it. Retirement Annuities (RAs) are tax deductible and clients can currently withdraw R500 000 from them at retirement. RAs, pension and provident funds are taxed at the end (assume retirement reform), but they have benefits along the way and their accessibility is limited.
It would be more prudent to consider retirement planning first and then a TFSA, which is essentially a tax beneficial bonus investment, over and above one’s core planning.
There are a variety of charging structures, including an administrative fee, sometimes tiered, but the adviser’s fee, upfront and/or on-going is negotiable.
Weighing your options
It has been rumoured that some advisers are weighing up the TFSA against other products from a commission point of view, but it should be considered against the client’s needs only. Whichever buttons you push on a calculator, a RA will pay more commission than a TFSA. On some life licenses, the adviser can take up to the first month’s premium of a TFSA as his or her upfront fee, but there are drawbacks for the client. Although disclosed, how do you think a client will react when he or she needs to liquidate the investment after a month and it is worth nothing because of fees?
Good financial planning always starts with an understanding of where the client is, relative to where he or she wants to be. Financial strategies and actions attempt to bridge that gap and products are used to execute the plan. You will know when it is appropriate to recommend a TFSA and when you do, consider the most appropriate charging structure that is suitable to the client and covers your time.
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