A case study outlining the value of Financial Advice where deciding how to hold a specific asset or investment can make a huge difference to your end result.

1. November 2015
Machrie Economic and Retirement
Outlook 2015

2. Let’s Talk Retirement AnnuitiesLet’s Talk Retirement AnnuitiesLet’s Talk Retirement AnnuitiesLet’s Talk Retirement Annuities
How it works now:
You can contribute up to 15% of Non-Pensionable Income
When you ContributeAssets to an RA it is immediately out of
your estate = No 20% Estate Duty when you pass away.
Protected from Creditors
InternalTax Rate of 0%
What is going to change:
You can contribute up to 27.5% of Remuneration or
Taxable income Capped at R 350 000 pa
Your Contributions are only excluded from your estate if
already deducted fromTaxable income. IE Disallowed
Contributions form part of your taxable estate.
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3. What do we hear?What do we hear?What do we hear?What do we hear?
1. ‘Retirement annuities don’t grow so well I can do better
on the stock exchange!’
2. ‘I have been paying this RA for 15 years and it only has
R109 682.22 and I’m paying R 1 500 pm in it there is
no way I can retire on this.This is a terrible investment’
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4. What you should ask?What you should ask?What you should ask?What you should ask?
1. ‘Retirement annuities don’t grow so well I can do better on
the stock exchange!’
So why not invest on the stock exchange through an RA? It’s
and investmentVehicle /TaxWrapper / Pot. It creates the rules
NOT the RETURN!
How often did you review your underlying investments? –
Funds, Shares, Cash etc? – How much do you spend on
maintaining and servicing your car?
Why not pay a professional to do the same for your retirement?
What is your car worth?
What is your retirement worth?
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5. Investing with different POTS
Endowment
30% on
Income, 10%
CGT
TFSA
0% Tax
Up to 15% soon
27.5% of taxable
income tax
deductible
Tax
Deduction
Investable
Contributions
limited to R 30 00 pa
& R 500K Lifetime
Withdrawal
Withdrawal
WithdrawalWithdrawal
Only after age 55.
1/3rd Lumpsum of
which R 500K tax
free rest up to 36%.
Remaining 2/3rds
provide an income
taxed at PAYE
CGT Max
13.67%
0% 0%
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6. What you should ask?What you should ask?What you should ask?What you should ask?
2.‘I have been paying this RA for 15 years and it only has
R 109 682.22 in it there is no way I can retire on this.This is
a terrible investment. Look I’m paying R 1 500 pm’
How many times in the last 15 years have you checked that
your savings were in line with your retirement goal?
Have you done the calculation to see what your growth is
relative to what you put in and what your fund value is?
Do you realise your premium has a 15% escalation and you
actually started with only R184.34pm? =Your return is
actually 10%
What have you done with yourTAX SAVING????
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7. The Real Value of an RA
If you earn R 300 000pa (R25 000pm) and contribute the
current Maximum of 15% pa with a Conservative Growth of
10% (CPI+3%).You get R39,345,229.83 after 40 yrs
(age 25 to age 65).Your salary increases with 6% pa
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8. The Real Value of an RA
If everything else stays the same BUT you contribute the new Maximum of
27.5%.You get R72,132,921.36 after 40 yrs. Let’s compare it to rather investing
in a discretionary portfolio, like Shares or direct UnitTrusts (Allan Gray and
Coronation). Remember internalTax rate of RA is 0% so let’s deduct 15% tax on the
Discretionary investment. (8.5%) = R52,296,082.22 Difference R 19 836 839
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9. The Real Value of an RA
But wait there’s more!When you contribute to an RA you get
some cash back.
The value of your RA is the RA plus the investedTax Refund (In a
Discretionary Investment). Suddenly your RA goes from
R72,132,921.36 to R88,344,706.85 (Extra: R16,211,785.49 or +
22.5%)
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10. The Real Value of an RA
Oh but wait yet once again!We are not done yet!What else can
you do? I’ll tell you.You can avoid having to pay taxes on your
Discretionary Investment by investing first in aTFSA up to the
annual maximum of R 30 000 pa. (your 8.5% goes back up to
10% -YAY!)
This means you get: R4,276,972.20 extra
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11. The Real Value of an RA
Let’s recap: Instead of investing in a discretionary portfolio we went form
R52,296,082.22 to R72,132,921.36: + R 19 836 839
You then invested your tax saving in a discretionary portfolio:
+ R16,211,785.49
Then you cleverly invested the maximum allowable amount into aTFSA first:
+ R4,276,972.20
R300,000.00
Investment
Growth RA
10.00%
Tax Free
Growth
Future Value
of Salary at
Retirement R4,492,337.35
6.00%
Discretionary
Investment
Growth 8.50% less 15% Tax Inflation 7.00%
31.00%
27.50%
Contribution to
RA.
Tax Saving Value of RA
Value of
Discretionary
Investment
Value of Tax
Free Savings
Account
Total Value of
Saving in an RA VS
Investment in
Discretionary
Investment
Year 1 R82,500.00 R25,575.00 0 0 0 R0.00 0
Year 2 R87,450.00 R27,109.50 R178,200.00 R0.00 R55,242.00 R233,442.00 R176,962.50
Year 3 R92,697.00 R28,736.07 R288,717.00 R0.00 R89,502.27 R378,219.27 R284,701.31
Year 4 R98,258.82 R30,460.23 R415,847.52 R0.00 R128,912.73 R544,760.25 R407,159.74
Year 5 R104,154.35 R32,287.85 R561,586.62 R2,326.97 R171,804.00 R735,717.59 R545,922.67
Year 6 R110,403.61 R34,225.12 R728,148.89 R6,749.88 R218,984.40 R953,883.18 R702,729.71
Year 7 R117,027.83 R36,278.63 R917,991.61 R13,602.25 R270,882.85 R1,202,476.70 R879,489.56
Year 8 R124,049.50 R38,455.34 R1,133,840.27 R23,213.78 R327,971.13 R1,485,025.18 R1,078,295.67
Year 9 R131,492.47 R40,762.66 R1,378,716.76 R35,949.62 R390,768.24 R1,805,434.62 R1,301,443.27
Year 10 R139,382.01 R43,208.42 R1,655,970.45 R52,213.76 R459,845.07 R2,168,029.27 R1,551,447.96
Year 11 R147,744.93 R45,800.93 R1,969,312.43 R72,452.86 R535,829.57 R2,577,594.86 R1,831,065.97
Year 12 R156,609.63 R48,548.99 R2,322,853.30 R97,160.34 R619,412.53 R3,039,426.17 R2,143,316.21
Year 13 R166,006.21 R51,461.92 R2,721,144.84 R126,880.89 R711,353.78 R3,559,379.52 R2,491,504.30
Year 14 R175,966.58 R54,549.64 R3,169,225.91 R162,215.40 R812,489.16 R4,143,930.48 R2,879,248.74
Year 15 R186,524.58 R57,822.62 R3,672,673.08 R203,826.33 R923,738.08 R4,800,237.49 R3,310,509.46
Year 16 R197,716.05 R61,291.98 R4,237,656.43 R252,443.55 R1,046,111.89 R5,536,211.87 R3,789,618.82
Year 17 R209,579.01 R64,969.49 R4,871,001.09 R308,870.74 R1,180,723.08 R6,360,594.91 R4,321,315.43
Year 18 R222,153.75 R68,867.66 R5,580,254.96 R373,992.42 R1,328,795.38 R7,283,042.76 R4,910,781.00
Year 19 R235,482.98 R72,999.72 R6,373,763.43 R448,781.50 R1,491,674.92 R8,314,219.85 R5,563,680.36
Year 20 R249,611.96 R77,379.71 R7,260,751.73 R534,307.63 R1,670,842.41 R9,465,901.78 R6,286,205.15
Year 21 R264,588.68 R82,022.49 R8,251,415.58 R631,746.27 R1,867,926.65 R10,751,088.51 R7,085,121.27
Year 22 R280,464.00 R86,943.84 R9,357,021.14 R742,388.55 R2,084,719.32 R12,184,129.00 R7,967,820.57
Year 23 R297,291.84 R92,160.47 R10,590,015.09 R867,652.04 R2,323,191.25 R13,780,858.38 R8,942,377.16
Year 24 R315,129.35 R97,690.10 R11,964,145.95 R1,009,092.56 R2,585,510.38 R15,558,748.89 R10,017,608.56
Year 25 R334,037.11 R103,551.50 R13,494,597.65 R1,168,416.93 R2,874,061.42 R17,537,076.00 R11,203,142.40
Year 26 R354,079.33 R109,764.59 R15,198,136.75 R1,347,496.97 R3,191,467.56 R19,737,101.27 R12,509,488.84
Year 27 R375,324.09 R116,350.47 R17,093,274.52 R1,548,384.68 R3,540,614.31 R22,182,273.51 R13,948,119.48
Year 28 R397,843.54 R123,331.50 R19,200,445.51 R1,773,328.87 R3,924,675.74 R24,898,450.13 R15,531,553.18
Year 29 R421,714.15 R130,731.39 R21,542,204.21 R2,024,793.21 R4,347,143.32 R27,914,140.74 R17,273,449.35
Year 30 R447,017.00 R138,575.27 R24,143,441.64 R2,305,475.91 R4,811,857.65 R31,260,775.19 R19,188,709.55
Year 31 R473,838.02 R146,889.79 R27,031,623.82 R2,618,331.15 R5,323,043.41 R34,972,998.38 R21,293,587.88
Year 32 R502,268.30 R155,703.17 R30,237,054.51 R2,966,592.47 R5,885,347.76 R39,088,994.73 R23,605,811.15
Year 33 R532,404.40 R165,045.36 R33,793,164.36 R3,353,798.19 R6,503,882.53 R43,650,845.08 R26,144,709.50
Year 34 R564,348.67 R174,948.09 R37,736,829.46 R3,783,819.13 R7,184,270.78 R48,704,919.37 R28,931,358.48
Year 35 R598,209.59 R185,444.97 R42,108,721.99 R4,260,888.72 R7,932,697.86 R54,302,308.58 R31,988,733.53
Year 36 R634,102.16 R196,571.67 R46,953,696.35 R4,789,635.93 R8,755,967.65 R60,499,299.93 R35,341,878.04
Year 37 R672,148.29 R208,365.97 R52,321,214.27 R5,375,120.96 R9,661,564.41 R67,357,899.65 R39,018,085.97
Year 38 R712,477.19 R220,867.93 R58,265,812.89 R6,022,874.17 R10,657,720.86 R74,946,407.91 R43,047,100.46
Year 39 R755,225.82 R234,120.00 R64,847,620.00 R6,738,938.48 R11,753,492.94 R83,340,051.41 R47,461,329.82
Year 40 R800,539.37 R248,167.20 R72,132,921.36 R7,529,915.45 R12,958,842.24 R92,621,679.05 R52,296,082.22
What your Tax Saving on your RA is worth.
Starting Annual Salary (R 25
000pm)
Annual Salary Increase
Tax Bracket:
Maximum Tax Deduction
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12. Year 37 R672,148.29 R208,365.97 R52,321,214.27 R5,375,120.96 R9,661,564.41 R67,357,899.65 R39,018,085.97
Year 38 R712,477.19 R220,867.93 R58,265,812.89 R6,022,874.17 R10,657,720.86 R74,946,407.91 R43,047,100.46
Year 39 R755,225.82 R234,120.00 R64,847,620.00 R6,738,938.48 R11,753,492.94 R83,340,051.41 R47,461,329.82
Year 40 R800,539.37 R248,167.20 R72,132,921.36 R7,529,915.45 R12,958,842.24 R92,621,679.05 R52,296,082.22
78% 8% 14%
Effect of
Internal Tax
RA 37.93%
R3,498,591.48 R365,216.01
Effect of Tax
Deduction 31.00% 39.18%
Effect of
Adding TFSA 8.18%
77.11%
Total
Improvement
Total Split TFSA
& DI R20,488,757.69 26.38% Improvement
VS R4,276,972.20
DI Only R16,211,785.49
THE VALUE OF ADVICE!!!
Proportional Income Provision
The Real Value of an RAWhat am I trying to sell?
The value of Advice:
By investing in a differentWAY not more or in a different fund / share
your final portfolio balance improved from R52,296,082.22 to
R92,621,679.05.
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13. Return
Yes income is taxed differently at drawdown between RA’s
and discretionary investments. It still works but not on the
very small / short investments. Must be reviewed on a case
by case basis.
10% is quite conservative in the long run (CPI+3%)
You should probably do your calculations with a higher
expected return say CPI+6%? If you have enough time?
Unrealistic lets see………
My Favourite, Offshore:What will the Rand do?
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14. Return
Let’s see what it has done:
Would you agree it’s safe to assume a LONG-term average
depreciation of 9.31% for the Rand?
Safe to assume a 5% return offshore?
Rand equivalent return 14.31% pa? (long-term)
Do the same RA calculation but with new return =
R188,760,762.62 instead of R92,621,679.05 – 103%
improvement.
16-Nov-15
Today
1 year Ago
Ave
Devaluation
5 years
Ago
Ave
Devaluation
10 years
ago
Ave
Devaluation
20 Years
Ago /Euro
16 yrs
Ave
Devaluation
30 Years
Ago
Ave
Devaluation
Dollar 14.38 11.03 30.37% 6.98 21.20% 7.19 10.00% 4.67 10.40% 2.23 18.16%
Pound 21.85 17.37 25.79% 11.19 19.05% 11.73 8.63% 5.67 14.27% 3.84 15.63%
Euro 15.45 13.89 11.23% 9.5 12.53% 7.92 9.51% 6.35 7.17%
3 Currency
Ave 22.46% 17.59% 9.38%
2 Currency
Ave USD &
GBP 28.08% 20.13% 9.31% 12.33% 16.90%
Only existed as a
curency since 1999
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15. ConclusionConclusionConclusionConclusion
A little bit of planning can have a huge effect
You usually need advice more than you need a product.
Machrie’s fee based financial planning means your and our
interests are aligned.
Consider the benefits of a formal financial coaching
relationship.Ask us about our coaching agreements.
Thank you for listening.
ENJOY the BEER!
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16. Thank YouThank YouThank YouThank You
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