How tax, fees eat your money

2012-02-04 15:01

A good service is worth paying for, however, overpaying is simply throwing money away.

You work hard for your money so it is important that when you pay fees you ask questions and make comparisons to ensure you are receiving value.

At the same time, you don’t mind paying your fair share of tax, but you also want to make sure your investments are tax efficient

Financial adviser
A financial adviser will take a fee for the advice they have provided and you need to decide if their help is worth the fee.

For example, if you are investing R200 a month and the adviser is taking 3% on each contribution, that may sound like a lot but actually works out at R6 a month (R72 a year).

On the other hand, you meet with a consultant at a bank who advises you to invest R10 000 a month in a product. In this consultation it happens that you never see the adviser again but you later discover that he or she is receiving 3% on each deposit.

This equates to R300 a month or R3 600 a year – was the advice worth it?

Find out what the adviser will be making on both the upfront and on-going fee and work that out in rand terms – is it value for money?

Product fee
Whether you invest in an endowment, unit trust or retirement annuity (RA), there will always be a fee charged by the product house. Find out exactly how much that is.

Some unit trust houses have waived all upfront fees while others still charge 2%. There is also a yearly management fee which can vary from 0.5% to 2%.

For any policy such as an endowment or an RA, the fees are reflected as a “reduction in yield” – in other words how much less return you will receive as a result of the fees.

Unit trusts disclose these as “total expense ratio” and that informs you what the total yearly cost is of the investment. But this does not include the adviser’s fee.

Platform fees
Investment platforms provided by Linked Investment Service Providers are used for investment-linked retirement annuities and living annuities.

However, advisers also use them to invest clients across a range of unit trusts. These simply add another layer of costs and it is cheaper to invest directly with the underlying unit trusts.

Ask your adviser what benefit the platform provides and why they recommend it.

Tax-free investments
If you want to avoid tax, then you can invest in retirement products such as your company pension or provident fund, or a retirement annuity. These funds are exempt from both tax on interest income and capital gains tax. You also receive a tax break on your upfront contribution to a maximum of 15% of your salary.

Advisers may also recommend an endowment policy as all interest income and capital gains are taxed within the fund at 29%.

This only makes sense if your marginal tax rate in above this rate – in other words,
if you are earning in excess of R220 000 a year.

Before you invest in tax-efficient products, make sure you understand the fees charged by these investment products.

There is no point gaining from a tax perspective to give it all away in fees. These products are also less flexible and penalties may apply if you stop contributions.

 

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