Advisor warns against unrestrained enthusiasm for TFSAs

Story Highlights

• TFSA
• tax free
• Galileo Capital
• Thayn Nemand
• advises when not to use TFSA
• pay off debt first

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By Thayn Niemand

There is absolutely no doubt that available tax concessions and benefits ought to be employed to maximum benefit for any South African taxpayer. However, caution must be exercised NOT to view investment planning in a “tax vacuum” to the detriment of sound financial and investment planning principles.

Any financial planner worth his salt should be discussing the mechanics and benefits of tax free savings accounts (TFSA) with his clients. However, he should also be placing in perspective the positioning of this tremendous opportunity in relation to the holistic financial and investment goals of the client in question. For example:

• A client with credit card debt bearing non-tax deductible interest at say, 13% per annum, would be better advised to pay additional amounts to accelerate the payment of that debt instead of investing in a TFSA. What TFSA offers a guaranteed return of 13% per annum after tax, the effective return of this proposed debt redemption strategy?
• A client paying tax at 40% may also be better off investing in a unit trust-based retirement annuity for which Sars will be “contributing” 40% of the invested amount and which has an attractive internal cost structure promoting an enhanced investment performance when compared with “discretionary or voluntary investments” in the same underlying funds. (I like the unit trust-based retirement annuity as it allows a reduction/discontinuance of contributions without penalty should client cash flow challenges require a reduction of contributions.)
• A family man without sufficient capital or life insurance to meet the financial obligations of his estate and to maintain his family in the event of his demise or disablement would be unwise to choose to invest in a TFSA rather than effecting the necessary insurance cover to meet those contingencies.

Note: Lest the writer be accused of this stance due to the low commission or fee structure (as stated in this article), I must add that in the last week we have implemented 15 requests for TFSA applications AFTER being satisfied that the above principles were satisfied in the planning for those clients!

• Adv Thayn Niemand is a financial adviser with Galileo Capital, Eastern Cape