Tax implications could put retirement savings in major jeopardy

Entering into the property market and purchasing a car are regarded as two of the biggest investment decisions that you will make during our lifetime. However, the importance of retirement investing has been highlighted, and is not a decision which should be taken lightly.

 The public is becoming more aware of the need for proper retirement investing. But are they asking financial advisers the right questions with regards to their retirement clients? This could have serious implications in terms of Treating Customers Fairly and the parameters of fair and objective advice when it is established by the Retail Distribution Review (RDR).

A major consideration factor that needs to be taken into account when it comes to retirement investing is the tax relief that clients will receive once they retire. According to a recent newsletter published by the office of the Financial Advisers and Intermediary Services (FAIS) Ombudsman, clients are encouraged to ask financial advisers to explain the meaning of tax relief before investing into a retirement annuity.

"Understand that tax relief may mean different things to different people. As an incentive, the government gives tax relief to people who make contributions to retirement annuity funds,” says Noluntu Bam who is the Deputy Ombud at the FAIS Ombud.

There is a strict formula that financial advisers are expected to follow in order to explain this to clients. Bam adds that there are other important means of protection that the law affords policyholders whilst their money is in a retirement annuity.

Below are some of the recent cases that the Ombud had to handle which highlights the importance of their standpoint on the matter.

Become tax savvy

Bam points out that, in the first case, the complainant is a school teacher who was advised to take out two retirement annuity contracts. She stated in her complaint that she was advised that she was paying too much tax, so she needed the two contracts. She eventually found out that this was not the case and then demanded repayment of her premiums from the insurer, which the insurer could not do.

The complainant sought the Ombuds intervention. The Ombud pointed out to the complainant that by law she would not be able to access her premiums until she retires.

"Make sure your clients know that the tax free portion at retirement is not cast in stone. In other words, it is influenced by the withdrawals your client made during their working life,” says Bam.

"As the FAIS Ombud, we recognise that much is required from financial services providers when rendering financial services to a client. They are often required to seek relevant information that will enable them to advise clients accordingly. The case of Mr B and his trusted adviser, which is set out below, speaks clearly to this requirement of relevant information being essential to providing appropriate advice,” Bam added.

The value of proper advice cannot be under-estimated

Mr B met with his adviser wanting to withdraw R600000 from his provident fund. He was informed that he could access R315 000 tax free and of the remaining R285 000 only R36 000 would be taxed. However, SARS deducted R216 059 as tax.

Infuriated by what appeared to be the incompetence on the part of the provider, Mr

B lodged a complaint alleging that his provider had failed to inform him of the tax implications applicable at the time the financial service was rendered.

According to the correspondence received, the provider stated that Mr B had failed to disclose that he had utilised his tax free benefit prior to consulting with him. However, Mr B was certain he had informed the adviser that he had taken a retrenchment package before and requested that all his funds be paid out in full.

"To decide on the differing version of events, our office required compliance documents from the provider detailing the information sought from Mr B prior to providing advice. It became clear that Mr B had disclosed having taken his retrenchment package at the time the financial service was rendered,” says Bam.

The Ombud decided that, although the provider was not a tax practitioner, he ought to have known of the tax implications, given the information furnished by the complainant. At the very least, Mr B should have been informed by his adviser about this. As advisers they should have the relevant knowledge about these matters.

An offer of R100 000 was made to Mr B and the matter was settled.

The role of the adviser plays an important role in the reputation of the industry

Last year, the FAIS Ombud had to deal with 33 determinations, which is the second highest number of determinations in the offices recent history. When looking at the nature of the determinations, the majority of them result from either bad advice from the part of some unscrupulous advisers while others result from a misunderstanding between the adviser and the policyholder.

The role of the adviser in the industry is vital for its reputation. Determinations and disputes are costly and portray the industry in a way that the public loses trust in it. Relevant information should be sought prior to providing financial services to clients. Limitations on the part of the provider should be clearly conveyed to clients and tax implications relating to withdrawal of lump sums at retirement should be discussed and verified by SARS. Advisers need to be reminded that all matters from the Office of the Ombud are decided based on the documentary evidence.

Editor's Thoughts:
This shows the value of proper advice and the need for advisers to go into great detail regarding all implications relating to retirement planning. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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