Intergenerational wealth (#236)

Time is such an odd ingredient in the realm of wealth creation. When treated with respect, a good amount of time can be your greatest ally. When ignored, however, time can be your biggest risk.

In a country with so much historical inequality, the idea of intergenerational wealth seems entirely mythical. However, a small amount of money sprinkled with a great deal of time makes building a nest egg for the next generation seem downright simple. By the same token, sleeping at the wheel creates an opportunity for inflation to eat away at real returns. 

In this week’s episode, we explore intergenerational wealth building strategies using two real world examples. Is this our cutest episode yet? You tell us.

---

• Subscribe to our RSS feed here.
• Subscribe or rate us in iTunes.

---

Mark 

I have twin girls who just turned five.

I have contributed to their own respective RAs since they were eight months old. I started at R1k a month each and this contribution has increased by 10% a year. I will keep up with the annual increases for as long as possible, but I realise the contributions will become pretty large over time. 

My girls have Capitec bank accounts and are registered with SARS and file tax returns. They are building up tax credits from the RA contributions in their name with SARS given they have little or no taxable income. 

I realise this might not be the most tax-efficient or tax-effective option for saving for your kids and DeWet and others might disagree with it. I have outlined below why I went with this strategy over TFSA or unit trusts in their name or the plethora of additional options and combinations. 

1. RA is with Sygnia, so it is a low-cost product, and their capital can compound tax-free over a long period 50+ years. 
2. They can't touch it when they turn 18. I acknowledge this lack of access can be a double-edged sword given they might like it for a car, a deposit for a property, starting a business, etc.
3. The tax credits they are building up with SARS should see them receive some decent tax refunds when they first start working which they can use for the uses as mentioned earlier or to plough into their own TFSA or back into the RA for even more tax credits. I acknowledge I am giving SARS an interest-free loan and the effect of inflation on the tax credits is a downside here. I also recognise I am losing out on the tax credit myself. 
4. They can keep contributing to the RA's when they start working as it is already set up for them. 
5. Having the RA, Bank A/C, EasyEquities account, and a SARS efiling profile provides an excellent financial education base when they are older. 
6. TFSA and/or unit trust they can access when they are eighteen, and they could withdraw everything and blow it all so this strategy guards against this. Some may see this as excessive control or control from beyond the grave, and I take their point. 
7. This RA is their inheritance which should be substantial even in today's rands by the time they can draw down on it. Some of their inheritance they get when they are younger once the tax refunds kick in from the contributions and the balance when they are older. 

There are pros and cons to the above approach compared to other kids saving options but after I weighed several different approaches and strategies, I decided to go with this one for now for better or worse. 

---

Wesley

• The lifetime limit is inflated periodically
• The scheme is abandoned to inflation
• The allowable limits are significantly increased (as has happened in many other countries)

If the lifetime limit is not increased periodically, the TFSA scheme is abandoned to inflation and will become worthless, much like the interest income exemption has been abandoned.

At a 4.5% midrange inflation target, assuming the original 30k annual contributions took 16.7 years to max out the 500k, the value of the 500k limit at that date will be around 240k in today's money for someone starting out on that future date. Those future starters will be proportionally disenfranchised from the TFSA scheme. 

The time horizon from birth to earning enough to contribute to a tax-free account is 20 or 25 years. The optimal time horizon for a TFSA is much longer than that. 

A child born now, six years into the TFSA scheme, starting their contributions at 25 years old would have lost 75% of the value of the original 500k limit. It's not a very valuable loss at that point.

I’m assuming the lifetime limit will always increase to allow an annual contribution. If not, the best possible course of action is to get in on the ground floor on this once off opportunity before it becomes worthless.

---

Win of the week is: Henno

Feedback for Lizl, whose company wants to force her to move her brokerage accounts in-house. 

“It’s always important to take a closer look at the conditions of employment in your contract on the day you started. Anything that changes after that requires a process of consultation. The employer can’t make changes unilaterally. The consultation process is more than an email from HR. What typically happens is HR sends an addendum to your employment contract, none of the employees query it before signing and then it’s as if the consultation happened and you accepted it. I’d argue if my original employment contract didn’t include anything about this, if there was no consultation process and if I didn’t sign anything, they can’t enforce that rule. If they want to fire me after that, I’d go to the CCMA on the grounds of an unfair dismissal.”

---

Gerrie

My employer is massively exposed if I were to abuse any potential privileged information to do some insider trading, either on my own accounts or within family accounts. The regulatory world has changed massively in recent years and fines from the FSCA can run into 100s of millions in addition to imprisoning my employer’s directors. Banks and other institutions take this very seriously and would rather have too harsh restrictions on their employees than to allow anyone to abuse the system.

Financial institutions force all their employees to trade under a watchful eye.  It’s not fun, but I understand why. 

 I informed my employer’s compliance team of all my and my family’s accounts at EasyEquities and I told them I have no desire to move it.  Turns out the process was slick and simple.  I only buy ETFs at EasyEquities and never individual shares.  My purpose is to invest and not to trade and ETFs fall outside of the trading restrictions.  I made a declaration to that extent and the compliance team told me to happily continue doing so.  They may ask me for a statement from time to time and I’ll gladly supply it, but there is no need for any ongoing burdensome process. 

The entire process took me half an hour to resolve.  I made full disclosure.  They are aware of my accounts and my or may not check up later.  I have undertaken to inform them the moment I intend doing anything other than investing in ETFs.  I prepared myself for much pain that never happened.  So Lizl– my experience was that there was no need to move accounts and trigger capital gains events.  What a relief.

---

Koketso

 I started looking into my investments and was horrified that:

- My EAC was sitting around 2.45%; 1.15% of which was advice fees

- The general performance of my investments in the last 3 years was not great and with the 2.4% in fees I practically kept money under my mattress and all that prudence was for nothing!

What I have done so far is:

- Got rid of my financial advisor dropping 1.15% of fees from my EAC

- stopped contributing to my RA as I have intentions to move abroad in the next 2-5 years

- Moved funds from the more expensive products to a global feeder while I figure out what to do

I recognise that this is not ideal, but this was a first step and one step at a time!

And the questions:

1. For my global money, I would like to invest most of my USD abroad (not using any local platforms) and in ETFs. Do you have any recommendations? 

• I understand that from an estate planning perspective, Switzerland recognises SA wills should anything happen
• Before I fired him, my financial advisor recommended two products, the first with the above in mind:

1. the Galileo balanced fund which has fees of 2%+. I must mention here that the advisor works for Galileo so I was not 100% sold on this idea. 
2. the nedgroup investments core global fund, details also attached
3. For my local money, again I am all in for ETFs and would also want to look at moving away from my expensive platform.

- If I wanted to say move to a cheaper provider, how do I actually do that? Would there be CGT on my unit trust and TFSA?

- I am thinking the following for my ETFs

1. TFSA: 50% ashburton 1200 ; 50% MSCI world
2. Unit trusts:  50% - ashburton 1200, 30% satrix 40 and 20% MSCI world
3. Retirement annuity: I won't add to this for the moment. I know there is a requirement to have a max 30% offshore holding so I'm thinking to change the makeup of my RA to: 15% ashburton 1200; 15% MSCI world and not too sure what else  

---

Brendt 

My mother is 62 years old, and will be retiring from work in Apr 2022. My parents plan to save R20k a month from now on until they retire. My mother has no retirement products apart from one RA that has a current balance of R80k. My parents want to have as much of their savings available in discretionary savings as possible.

My idea was for them to pay the R20k monthly saving into my mother’s RA until it reaches a balance of about R220k. Then open up another RA with a different service provider and save the remaining monthly amount to this RA. 

That way my mother would have two RAs on retirement, both of which will have a balance of less than R247k, which is the lowest amount for which it is mandatory to buy a living/guaranteed annuity with. Meaning that she would be able to withdraw 100% of both RAs as a lump sum, tax free (She has yet to make use of the R500k tax free withdrawal concession), to invest in ETFs for retirement.

She will be able to reduce her taxable income in the year or so that she invests the money in the RAs, without being bound to a guaranteed/living annuity and the personal income tax implications on retirement (CGT is sooo much cheaper). In effect SARS will be paying them. :)Chris

Many young South Africans are drawn to the idea of working on the yachts in the Mediterannean as a way to explore the world and earn some hard currency. I spent five months as a steward, sailing from Monaco to Barcelona with plenty of glamorous stops along the way! 

I managed to save some of the Euros that I earned overseas and those are in a Standard Bank Isle of Man account (earning next to no interest). I am keen to make that cash work a bit harder, so I would like to exchange it into Rands and invest it in some ETFs (a question for a later date). I have been hesitant to “just transfer” the Euros to my South African bank account until I fully understand the tax implications. 

What is the most tax efficient way to get the funds from my Isle of Man account to my South African account?

What is the best way to actually transfer the funds from one account to the other?

---

Brett 

My emergency fund will cover about 6-9 months of living costs. That is more than I’ve got invested in equities. I’d like to have much more exposure to equities to get maximum growth over the next 20 years. 

How would you recommend investing such a lump sum to gain relatively high growth for cash (5-10%), while keeping it relatively low risk, and liquid?

I’ve considered the following:

FNB Money Maximiser - 3.75% interest, completely liquid. The interest rate I believe is fixed to the lending rate as it was closer to 7% a year back. It’s still higher than typical liquid saving accounts. Fixed deposit or 32 day notice was not considered liquid enough.

Money Market products offered the highest growth out of the products i looked at, i.e. a few percent above inflation. But the costs and fees were also the highest, and based on recent performance and inflation, the high fees largely eroded any gains. 

High dividend or REITs ETFs, which seems to have a yield of about 2-5%, so very much in line with inflation. (And then some growth)

Bond ETFs, like New Funds GOVI, which was about 6-7% growth based on 3-5 years. 

And last is to keep it in my mortgage to reduce the interest I pay each month, at prime.

So many options right? Would you recon it is best to keep the cash?

---

Candice

De Wet mentioned asking your HR department to adjust the RA contribution figure on their payslip to include the personal contributions.

My payslip has been showing an R2906.75 shortfall in contributions as I have been doing my own thang.  I asked the HR department to adjust this and the difference is just over R1000 extra on my net. This will be going straight to my TFSA monthly.

---

Lebo

I currently have a tax free account with EasyEquities. I've maxed out the R36000 limit for the year and I know the lifetime limit is R500000.

I was wondering once the lifetime limit is reached, can I open another tax free account and receive the R36000 tax free benefit on the new account? Basically can I start the process over with another account and effectively have a R1m lifetime limit?