The Financial Wellness Coach: How a wrapper for invest…

Question: In a previous column, you talked about using a wrapper around your investments. Please explain what a wrapper is and how it works?

First published in Daily Maverick 168 weekly newspaper.

Reply: A wrapper is a structure through which you make a financial investment. If you invest in the same basic investment through different structures, you will get very different results. If you choose your wrapper wisely, you can get many additional benefits from your investment.

Take a simple mutual fund investment.

These are extremely popular as they are an easy and convenient way to invest in the stock market. I meet a lot of people who have all of their investments in mutual funds and ETFs and have built sizeable portfolios. The sad thing is that they have left money on the table or have exposed themselves to unnecessary tax and cost losses because their investments are not in the optimal structures. Had they invested through an appropriate wrapper there would have been many additional benefits to improve their overall financial wellbeing.

Below I will illustrate the advantages of the different wrappers:

Many people invest their money directly in a mutual fund. However, you can also invest in this mutual fund through any of the following products:

  • A tax-free savings account;
  • An investment in life; or
  • An old-age pension.

These products are the sleeves through which you can invest in the mutual fund.

Tax-free investments

You are allowed to invest R36,000 annually in a tax free savings, with a total limit of R500,000 over your life. There is no tax on investment growth or the proceeds of a tax-exempt investment. This investment can be accessed at any time.

If you had invested your mutual funds through a tax-free structure, you would not pay dividend tax or capital gains tax on the proceeds.

Lifetime investment

If you plan on investing for at least five years, consider putting your mutual fund in a life-wrapped investment wrapper. There are several benefits that you will get:

Investment growth is taxed at a preferential tax rate of 30%. So if your tax rate is over 30%, you will save taxes immediately. The capital gains tax is 12% instead of a possible 18%;

When the investment falls due, no further taxes are due; and

When you add a beneficiary to the foundation, you don’t have to pay executor fees of R40,250 for every R1 million.

However, you need to make sure that you opt for a new generation policy with transparent fees. Some of the old versions of this product have high up-front fees and expensive structures, which defeats the purpose of the product Exercise.

Retirement pension

If you want to save for your retirement plan, use an annuity insurance. Your premiums will be deducted from your income for tax purposes. This means that the recipient of the revenue at your marginal tax rate will add to your savings.

The increase in the old-age pension will be tax-free.

The disadvantage of an old-age pension is that you cannot access the money until you are 55 years old. If that was your intention when you invested in the mutual fund, it would make sense to get the tax break upfront.

One of the great advantages of old-age pensions is that it is not part of your estate. This saves you 20 to 25% inheritance tax if you die. If there is a beneficiary, there are no 4.025% executor fees payable.

As you can see, understanding why you are making a particular investment makes a lot of sense. If the duration is shorter, use unit trusts. If you are investing in the long term, choose the right vehicle. Remember that you are investing in the same portfolio – only the wrapper changes. The benefits of using a wrapper can be significant. DM168

This story first appeared in our Daily Maverick 168 weekly newspaper, which is available free of charge to Pick n Pay smart shoppers at these Pick n Pay Shops.

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Kenny Meiring

Kenny Meiring MBA CFP is an independent financial advisor. You can contact him at Financialwellnesscoach.co.za. Please send your questions to [email protected]

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