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POSTRETIREMENT CASE STUDY DESIGNED AND FACILITATED BY FRANCOIS DU TOIT, CFP® REGISTERED TAX PRACTITIONER INFO@FRANCOISDUTOIT. CO. ZA

INTRODUCTION

PURPOSE § Real client, real facts, real advice § What the client wanted to know vs the advice he received § Long-term impact § How it could have been different § Learn § Review § Adjust § Enhance 4

WHAT THIS SESSION IS NOT ABOUT § Criticizing § Blaming § Stereotyping § Right vs Wrong § Judging

The Facts

THE FACTS John (55) and Linda (50) met with their independent financial adviser in August 2017. John is planning to retire in 3 years when he turns 58. John and Linda want to know if it will in fact be possible for John to retire at age 58 or if he should rather postpone retirement to a later age. They asked for the planning to take the following in account: § Require R 50 000 per month after tax § Estimated expenses will be R 35 000 per month § Exclude any of Linda’s own retirement provisions

THE FACTS JOHN’S ASSETS &LIABILITIES Type Description Property Primary Residence, Morningside Property Vehicle Investment Property, Honeydew 2017 Land Rover Business Interest Market Value Outstanding Debt 3, 150, 000 1, 400, 000 850, 000 - 1, 200, 000 884, 000 Business 7, 000 - Member Interest Close Corporation 2, 200, 000 - Loan Personal Loan - 169, 000 14, 400, 000 2, 453, 000 Totals

THE FACTS JOHN’S RETIREMENT PRODUCTS Type Description Market Value Preservation Fund Provident 1 197, 000 Preservation Fund Provident 2 1, 448, 000 Preservation Fund Pension 1 979, 000 Preservation Fund Pension 2 321, 000 Provident Fund Business 1, 063, 000 Retirement Annuity RA 1 72, 600 Retirement Annuity RA 2 334, 000 Totals 4, 414, 600

THE FACTS JOHN’S LIFE ASSURANCE Type Joint Description Life Cover Value 542, 000 Beneficiary Spouse

THE FACTS ADDITIONAL INFORMATION TO CONSIDER § Term until John’s age 90; § Move into (sea side) property held in the CC when John retires; § Rent out the primary residence for R 20, 000 p. m. ; § Sell Honeydew property; § Sell shares in business for estimated R 10, 000; § Minimise debt by John’s retirement; § Should property in CC be transferred to Linda’s name for Estate Planning purposes? ; § John and Linda want to review their wills;

Answering the question

WHAT IS THE QUESTION? Can John retire at 58 and sustain his required after tax income until at least his age 90? What about emergencies? Will he need access to capital?

APPROACH TO FOLLOW § Cash Flow Based Planning § Determine all net capital amounts available § Consider sources of capital § Consider income solutions / sustainable drawdown § Consider current debt

Approach to follow § Cash Flow Based… § Best is to use software to speed up the process § My current software of choice (www. miplan. co. za)

Disclosures § § I do not represent Mi-Plan I do not receive any remuneration from Mi-Plan I used the software in my own practice My personal choice Let’s switch to the software

CONCLUSION § Income is sustainable at 4% p. a. and adjusting for inflation thereafter § Good balance between compulsory and discretionary capital § To repay debt: § Home Loan – R 1 400 000 – Required repayment: R 44 685 pm § Land Rover – R 884 000 – Required repayment: R 28 215 pm § Personal Loan – R 169 000 – Required repayment: R 5 400 pm

CONCLUSION § Sell Honeydew property and use net proceeds to pay off (or significantly reduce) Land Rover § Pay additional on home loan (from vehicle finance) § Would you transfer the property from the CC to Linda? § The plan is not sustainable without the rental income from the primary residence

CGT § Sale of business § Sale of Honeydew Property

Advice the client received

WHAT WAS DONE The financial adviser completed the following: § § § § Needs Analysis Risk profile Retirement Action Plan (IWP / Cash Flow Plan) Analysed current portfolio Determined income needs Determined retirement objectives Comprehensive and well documented ROA Quotes

FIRST ADVICE Cash in all retirement products (excluding business provident fund) § Take R 500 000 “tax-free” amount in cash § Invest balance in Living Annuity (not subject Reg 28 – increased offshore exposure for Rand hedging) § Draw minimum of 2. 5% p. a. (does not need income) § Implement new Unit Trust based RA = to 2. 5% p. a. to offset tax implication Does the recommendation address the client’s concerns?

FIRST ADVICE - COMMENTS Cash in all retirement products (excluding business provident fund) Why now and not at 58? How will this enhance John’s retirement plan? John does not require additional income Why cash in all retirement products and then implement a new RA to neutralise the tax effect? § Current funds § Growth taxed at 0% § No CGT § Excluded from estate § §

SECOND ADVICE Implement direct offshore investment of R 1 m § Neither John or Linda have any offshore investments § John to donate funds to Linda and investment done in her name § R 500 000 “tax-free” amount from retirement funds § Withdraw R 500 000 from access bond facility § Take advantage of weakening in the Rand § Rand’s recent strengthening makes it cheaper to buy in § Use as emergency fund § Not included for income provision

SECOND ADVICE - COMMENTS Implement direct offshore investment of R 1 m § Reason: cheaper to buy USD, EUR, Pounds, etc. now than at the end of 2016 § Betting on the rand weakening § Is the client concerned about SA? § Does the client plan to move overseas? § Does the client plan to spend time overseas? § Asset Swap can achieve the same – must be a clear goal, objective or reason for taking funds physically offshore § Currencies are very volatile § Offshore Assets + Currency Overlaid = Increased Risk

SECOND ADVICE - COMMENTS Implement direct offshore investment of R 1 m § Small portion of total wealth, so not necessarily inappropriate idea § Source of capital to invest – big concern: concern § R 500, 000 tax-free from retirement funds § R 500, 000 withdrawn from access bond facility § Close to retirement – objective must be to settle debt, not increase it – refer to required repayments discussed earlier § Emergency fund – access within 24 hours – not suitable § Excluding funds from income provision assumes maximum risk…

THIRD ADVICE Implement Tax Free Savings Account § John to contribute R 33, 000 p. a. § Linda to contribute R 33, 000 p. a. § For as long as possible Does the recommendation address the client’s concerns?

THIRD ADVICE - COMMENTS Implement Tax Free Savings Account § No clear reason or objective § Focus must be settling debt rather than saving § 3 years is too short

FOURTH ADVICE Transfer property from CC to Linda’s name for Estate Planning purposes § All other properties are in John’s name Does the recommendation address the client’s concerns?

FOURTH ADVICE - COMMENTS Transfer property from CC to Linda’s name for Estate Planning purposes § Not clear if the property will be moved out of the CC § OR if the member interest will be transferred to Linda § Also not clear what benefits this change will bring (s 4 q already applies) § Implications: § From CC to Linda – Donations tax, CGT, Transfer Duty, Transfer Costs (CC) § Member interest to Linda – Donations Tax, CGT, Securities Transfer Tax (CC) § If Linda buys the property, no Donation Tax

FIFTH ADVICE Cancel current joint life assurance policy (R 542, 000) § Replace with income benefit on death § R 80, 000 p. m. § R 1, 000 Lump Sum for “some liquidity” § Provide income to Linda whilst estate is wound up § Outstanding tasks as per ROA: § Re-drafting of wills § Estate Plan Does the recommendation address the client’s concerns?

FIFTH ADVICE - COMMENTS Cancel current joint life assurance policy (R 542, 000) No proper analysis available (Estate Plan pending) Income Death Benefit makes sense… However, is R 80, 000 pm the appropriate amount? She will continue to work… “Some liquidity” not sufficient… No need to cancel, only implement additional cover required § Recommendation pre-mature § § §

FEES (OR COMMISSION) QUOTED - % Living Annuity Retirement Annuity Offshore Upfront AF 1. 71% 2. 85% 2. 28% Ongoing AF p. a. 1. 14% 0. 68% Platform 0. 46% 0. 57% 0. 65% AMF 1. 17% 1. 33% 0. 80% Total Ongoing 2. 77% 3. 04% 2. 13%

FEES (OR COMMISSION) QUOTED - RAND Living Annuity Upfront AF Offshore R 48, 793 - R 22, 800 - R 1, 740 - As-and-When p. a. Ongoing AF p. a. year 1 Retirement Annuity R 32, 529 R 400 R 11, 400 Estimated lost fees year 1 § Upfront § As-and-When § Ongoing AF – – – R R R 71, 593 1, 740 44, 329 § Total – R 117, 662 R 1, 418, 528 > 32 years Linear…

CONCLUSION

CONCLUSION § Investigate answers asked by clients – run the numbers § Focus on questions asked by clients § Be aware of market cycles and conditions when a client retires § Never allow external circumstances to influence the advice and recommendations § Never make short term decisions that will have a long-term impact § Get comfortable with Cash Flow Based Planning

SOFTWARE § For Mi-Plan § Lyle Dedekind (Gauteng) § lyle@miplan. co. za § 072 232 2859 § The Tax Tool (T 3) § Francois du Toit § http: //tech. francoisdutoit. co. za § info@francoisdutoit. co. za § 083 275 8368

POSTRETIREMENT CASE STUDY DESIGNED AND FACILITATED BY FRANCOIS DU TOIT, CFP® REGISTERED TAX PRACTITIONER INFO@FRANCOISDUTOIT. CO. ZA Download the slides at https: //www. francoisdutoit. co. za/how-a-simple-mistake