Avoid these two financial mistakes

I help people structure their finances when they retire and therefore get to see the end result of their life’s investments. 

I often come across people who have not used a financial planner in years.  While they have generally been very diligent with their savings, their investments are not as big as they could have been had they not made the following mistakes.


MISTAKE 1: Focus on costs rather than growth

Many investors fixate on the costs of the investment rather than the potential growth that they could get. 

In order to avoid paying any fees to a financial advisor, they do their investments themselves. This is fine if they are financially savvy and continuously pay attention to what is happening in the economy and the markets.

However, many are not and this results in opportunities being missed and investments under-performing by a lot more than the 0.5% annual fee that they are saving by not having an advisor. Over a lifetime an underperformance of as little as 1% can have a significant impact on the end result.  A skilled adviser should be able to do better than this.


MISTAKE 2:  Not structuring the investments properly

Many of those who do their own investments, hold them in structures which are not the most efficient when it comes to paying taxes, estate duty and executor fees. 

I often come across investors whose only investment when they reach retirement is a substantial unit trust portfolio.  Had they spoken to a CFP® professional, these same unit trusts (with one or two tweaks) would have been housed in structures which would have resulted in the investor and his or her family being a lot better off financially.  I will look at two structures that could be used:


Retirement Annuity (RA)

New generation retirement annuities allow you to invest in unit trusts.  Your overall portfolio must conform with Regulation 28 so you may need to adapt the holdings. 

This is a small sacrifice to receive the following benefits:

  • Your investment is tax deductible (if it is less than 27.5% of your taxable income and R350 000).

    So, if you invested R100 000 and your marginal tax rate was 45%, the investment would only cost you R55 000.

  • The investment growth is not taxed.The unit trust on its own would attract Capital Gains Tax (CGT) and other taxes.
  • The RA and any retirement vehicle that you transfer the proceeds to will not form part of your estate.This will save your heirs 20% in estate duty and 4% in executor fees.

 

The proceeds of the retirement annuity must be used to provide a pension.  In the example above, the investor used unit trusts to save for retirement.  Had this investment been housed in a retirement annuity structure, it would have been a lot more valuable.


Endowment policy

An endowment policy has received a lot of bad press over the years, and it is unfortunate that the new generation endowments with transparent, low-cost structures are tarred with the same brush.

If you are using unit trusts for a long-term investment, consider housing them in an endowment structure.  You will enjoy the following benefits:

  • The investment would be taxed in the policy at favorable rates (30% and 12%) which would be less than that which the typical investor would pay.
  • You may attach a beneficiary.This will save you the 4% executor fees

If you avoid these two mistakes, you should end up with a much healthier investment portfolio when you retire.  A Certified Financial Planner would certainly help you avoid these mistakes. 


Kenny Meiring, CFP®

SUCCESSION FINANCIAL PLANNING