2 years ago

Blue Chip Issue 78 - Jan 2021

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20 Old Mutual Wealth

20 Old Mutual Wealth (OMW) is an elite service offering brought to you by several licensed Financial Services Providers in the Old Mutual Group. This document is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. OMW, the Old Mutual Group and its directors, officers and employees shall not be responsible and disclaim all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of, or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this document.

SLOWLY UNPACKING FINANCIAL EMIGRATION South African financial planners are regularly presented by clients with the same conundrum: should I leave South Africa… or take all of my money out of the country? OFFSHORE INVESTMENTS We are members of the Vulintaba Association, a group of lifestyle financial planners all of whom are CFP® Professionals. We work together to see how we can serve our clients by doing financial planning better and also how we can run world-class businesses. Before lockdown, a number of us were debating the concept of financial emigration. If you are reading this publication you are in the financial services industry, but let me be clear from the outset: we at Veritas Wealth believe that the financial planning process comes first, and then when this planning process is finished, and then and only then, we look to implement the plan and use financial products. This distinction is critical because financial emigration is the implementation of a financial plan. If you just jump straight to financial emigration, you are, as they say, putting the cart before the horse. The genesis of financial emigration is based on fear. As financial planners, our job is not to decide how or where people should live. Our skill is to show them the consequences of the lifestyle decisions that they have come to discuss with you, their trusted Our skill and value add is in the questions we ask rather than in the answers we give. advisor. All our advisors recently completed a behavioural coaching programme. During the course, one starts to pick up that as financial planners we all enter conversations with clients with our personal biases and blinds spots. It is critical to recognise these and also to try to keep them, as best as possible, out of the conversation. Never forget, the meeting is about the client, not about you and your opinions. Our job is to help the client unpack the issue of financial emigration for them and from a family perspective. Our skill and value add is in the questions we ask rather than in the answers we give. Our clients have the answers themselves; we can only show them the likely consequences of the decisions they make. Currently, many South Africans are losing faith in the government and the country. There is a real sense of fear but, interestingly, many clients have no intention of leaving, either because they cannot afford to leave or they realise this is a wonderful place to live. RULE 1 | Fear sells If you want to sell a product or an idea, then fear is a powerful tool. If you want people to take money offshore so that you can earn offshore income, then hit the fear button. It will sell the product or service very successfully. The media regularly use bad news and fear to capture our attention, so product houses and advisors are now too pushing this button more regularly. The issue is that more clients are saying that they do not want to make contributions to retirement annuities (RA) this year. They also want to cash in on their pensions and take what they can offshore. Some even want to sell their homes. You hear the comments around the braai or at small gatherings. Prescribed assets, sovereign downgrades, tax morality and state capture add to the long list of other reasons to get your money out of here. Your job as a planner is to slow this down and go through the numbers. Your client must understand the consequences. Also ask them, if they have considered the fact that they may be wrong. RULE 2 | The power of compound interest We assume you pay tax at 41% marginal rate. This was to February 2020. The money is invested in a RA pre-tax. When you retire, your tax rate is lower, probably 25- 30% marginal when you start drawing a pension. A common conversation is about getting as much money offshore as you can get your hands on. Should you contribute to your retirement fund? Here are the numbers: Do not use RA Use RA Income earned pre-tax R350 000 R350 000 Contribution to RA R0 R350 000 Income tax payable 2020 @ 41% (R143 500) R0 Amount available for investment R206 500 R350 000 43

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