By Jaco Prinsloo, Certified Financial Planner at Alexander Forbes Financial Planning Consultants
The benefits of saving are well known, as are the tax benefits offered by tax-free savings accounts (TFSA) and retirement annuity funds (RA). But what is unclear is which savings vehicle is better. Before we look at what the benefits of each, let’s look at factors to consider when choosing between a TFSA and an RA.
What is the difference?
The TFSA was introduced by the National Treasury to encourage South Africans to save in an easy, flexible and affordable way for future expenses and long term investment goals. To allow self-employed individuals and investors facing a retirement shortfall to save in their personal capacity, specifically for retirement, RA’s were created.
The tax benefit
Both TFSA’s and RA’s allow you to grow your savings tax-free, meaning there is no interest, dividend, income or capital gains tax payable on the investment growth. The tax implications on contributions and withdrawals are, however, quite different.
Contributions and withdrawals
With a TFSA, you can start from saving as little as R250 per month or make a lump-sum contribution of up to R33 000 per tax year for 15 years up to the lifetime limit of R500 000. Any contributions over the limits are taxed at 40%.
Unfortunately, there is no tax saving on the contributions you make to TFSA’s, but you can withdraw your savings as a lump sum or as a monthly income tax-free. There is no minimum investment period, but the penalty for withdrawing your funds is that any funds withdrawn cannot be replaced and permanently reduce your R33 000 annual and R500 000-lifetime limits.
An RA allows you to legally reduce your income tax by your contributions with a maximum up to 27.5% of your taxable income or R350 000 per tax year. The tax deduction effectively acts as tax savings rewarding you for making provision for your retirement. Although there are no contribution limits, any non-deductible contributions will be rolled over and deducted in the following tax year.
From the age of 55, you can retire and convert your RA savings into an income in the form of an annuity. At least two-thirds of your RA has to be converted into an income if the fund value is more than R247 500 at retirement. The income from the annuity is subject to income tax. The remaining one-third can be taken as a cash lump sum. Once in your life, you will receive R500 000 tax-free, and the balance will be taxed on a sliding scale of between 18-36%.
Both TFSA and RA’s have access to multiple asset classes eg, local and global cash, bonds, property, and shares. To protect investors, the RA’s are regulated by the Pensions Fund Act, which includes Regulation 28. With the restrictions of Regulation 28, there are certain limits on where and how much you can invest. For example, you can only invest 30% offshore and up to 75% in company shares. The TFSA can be any one of a range of underlying investment vehicles governed by their respective laws. It is not subject to Regulation 28, which means you can invest where you want and as much as you want within the limits in any asset class.
Creditors and Estate duty
An RA protects your savings from creditors and estate duty by distributing your savings directly to the nominated beneficiaries once approved by the trustees of the fund. Any unclaimed deduction made after 1 March 2015 to your RA may be included in your estate. A TFSA offers no protection against creditors, and if invested in a life policy, it will be paid directly to the nominated beneficiaries on death; otherwise, it will be paid to your estate. If your estate is worth more than R3,5-million estate duty could be payable.
The better option?
If you are paying tax on your income, are comfortable with Regulation 28 and can afford to keep your money invested until at least the age of 55, an RA might be the better option because of the tax-saving on the contributions you receive.
If you want to invest more in a specific asset class like offshore equity to increase your global exposure, and want access to your funds, a TFSA might be the better option due to the flexibility the investment offers.
Why not use both?
Combining an RA with a TFSA reduces your income tax while saving and provides you with tax-free withdrawals on withdrawal. This strategy also allows you to escape the restrictions of Regulation 28 by making use of the TFSA flexible asset allocation to increase your total offshore or specific asset class exposure based on your investment goals.
Asking which investment is better might be the wrong question as both the TFSA and the RA offer unique benefits that should be included in your overall investment strategy. The choice will depend on you, your circumstance, and your investment goals, and consulting a certified financial adviser will help guide you. Whichever option you choose, by choosing to save, you have already made the right choice.
THE TRIALS AND TRIBULATIONS OF TRADERS TRADING FROM HOME
Steve Haworth, CEO of TeleWare Group
Banks had hoped to keep their London trading floors open amid the worsening coronavirus pandemic, insisting traders were “key workers”. But trading floors were quickly cleared and employees sent to work from home in isolation.
Firms needed to quickly adapt to remote working. This meant recreating the carefully monitored environment of the trading floor at thousands of sites.
With major disruption across the entire sector, it seems the Financial Conduct Authority felt no other choice but to relax regulations on recording calls. But does this measure introduce more problems than it solves?
Why call recordings are regulated
Whilst regulations differ globally, authorities in the UK, US and Hong Kong have long required trading floor phone calls to be recorded for certain activities.
In the UK, the FCA demands financial institutions keep records of all trades and transactions related to certain types of business for at least six months. Recording calls and reporting trades are essential to the regulators’ ability to monitor the markets for abuse, such as insider trading. Requirements to record calls apply to companies that receive and execute client orders to buy or sell in the financial markets.
Each trading floor in a financial firm also has its own set of policies which staff must abide by. For instance, the trading floor manager must ensure that all trade-based calls are recorded and monitored. An often-used policy that still exists is to ban all mobile phones on the trading floor. To enforce this, mobile phones are often stored in lockers and traders are required to use turrets to host calls.
Beyond call recording, most traders and salespeople need to sit together on a monitored trading floor in order to meet regulatory rules. A range of compliance complexities under GDPR, MiFID II and Dodd Frank have meant working from home has simply not been an option for many traders.
The rush to relax regulations
Traders are now required to work from home – if they can. The FCA has said it accepts that some scenarios may emerge where recording calls may not be possible. Adding that it expects companies to “consider what steps they could take to mitigate outstanding risks if they are unable to comply with their obligations to record voice recordings.” If financial services companies are unable to record calls they are then expected to “come up with a plan to fix the problem”.
Yet, trading firms have enough problems to solve without having to decipher call recording requirements. Why should traders spend extra time updating the FCA and coming up with an alternative solution when one already exists?
A smart alternative
Smart solutions – such as mobile call recording which meet global regulations – have perhaps been overlooked as a way to maintain business continuity.
Mobile voice recording technology (MVR) is not new. It has existed since 2011 and includes secure and reliable voice and SMS recording, easy to use conferencing and robust, accessible voicemail. It has matured over the years and proven itself to be flexible and highly reliable.
Technology can keep traders trading from wherever they are. Ensuring they can operate effectively at home while remaining compliant.
STOP THE CONFUSION: HOW TO KNOW IF YOUR BUSINESS MAY BE INSURED AGAINST COVID-19
By Alex Balcombe, Partner at Harris Balcombe
The last few weeks has seen businesses in hospitality, tourism, retail, leisure and more forced to close their doors following the Government’s orders that they should close to prevent the spread of coronavirus.
While this is expected to flatten the curve and reduce the number of coronavirus cases, it will of course have an impact on businesses and employees alike. For small businesses especially, there are many concerns about how they can claim on their insurance to weigh the fall of this impact.
In response to calls to help struggling businesses, the Government has informed the public that companies who are facing turmoil will be able to claim on their business interruption insurance during this difficult time. For most, this is wrong.
The insurance industry has also been extremely vocal that there is no cover for any coronavirus-hit businesses during this tough financial period. This isn’t strictly true either.
How can businesses see through the mixed messaging and best secure their future and their livelihoods and reduce money worries? It’s an extremely stressful time for many companies, and confusion over whether or not they can be covered can only cause more unnecessary stress.
Since it’s a new disease, most businesses will not be covered for business interruption due to COVID-19. In fact, the vast majority of policies do not cover anything related to COVID-19.
That said – don’t rule out the idea that you may be covered. There is a chance that you will be covered against COVID-19, but not know it. This is a very small chance, but your current cover may already protect your business against the consequences of coronavirus, and the nationwide response to it – though those with this cover are unlikely to realise it.
How Could I Be Covered?
Not everyone has business interruption insurance, as it’s not a legal requirement. It is entirely up to the policy holder to weigh up the benefits of having it, and their ability to trade should a disaster happen.
To be considered for cover for COVID-19, there are two types of policy extensions to your business interruption cover that can potentially cover you for this situation:
Infectious Disease Extension
Many policies expressly state which diseases fall within the realm of being an infectious or notifiable disease. If this is the case, your policy will not provide cover. As it is a new disease, these policies will not have included COVID-19.
Other infectious disease extension policies will define the disease with reference to the actions of the government. Since the UK Government has named COVID-19 as a notifiable disease throughout the UK, it is possible that your business may fall into this definition, thus meaning you may be able to make a claim.
However, again, it’s not always that simple. Many policies require the disease to have been on your premises, while others specify a radius from your premises in order to qualify.
Denial of Access Extension (non-damage)
Denial of Access Extension (non-damage) policies may cover you if you’re prevented from accessing your property. This could be due to an event, or by the actions of a competent authority, which could cause your business interruption cover to engage.
If covered by this clause, there are often very subtle differences in wording in your policy. This could depend on the insurer or policy. You may well be covered, but it will depend on your particular circumstances, and the specific policy wording.
It’s clear that the Government needs to do more in ensuring there is clear messaging for businesses, and to help the insurance market look after policy holders. This is an unprecedented situation, and with many people looking to claim on their insurance, we’re already seeing major delays which could have a domino impact.
People throughout the world are understandably facing all kinds of worries because of the current pandemic. Our ways of living have changed, and many business owners will not have experienced a situation like this in their life times. If you own a business and are unsure about whether you can claim for business interruption, or are confused about ambiguous wording, get in touch with a loss assessor.
These claims are not simple, but loss assessors will be experts in business interruption insurance, and will specialise in large and complex claims. They will be able to help and guide you along the way, check your wording and work on your behalf to make sure you get everything you are entitled to.
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