There is no doubt that the COVID-19 pandemic had a severe impact on the Government’s budget. This linked with struggling state-owned enterprises (Known as SOE’s), Government bailout needs to collect money somewhere. During the pandemic, the social injustice of South Africa has just been highlighted bringing to light, more socialist solutions such as NHI, Social Security reform and more tax for the rich.

Prescribed Assets have been on the ANC agenda for some time, and now seems to be a great opportunity for Government to consider this. However, with the track record of government, this could severely impact the retirement planning of your clients. There are several factors that could impact the retirement outcome of your clients, and some of them does not have to do with the retirement planning you do for your clients.

We have seen that traditionally where there is a state pension, people tend to save less as their motivation and driver ultimately impacts their mindset to save. Adding prescribed assets are likely to have the same effect and have a direct impact on the willingness to save.

Most South African’s does not want to pay tax, not because it is something you must do, but rather due to our government’s inability to manage the taxes efficiently, corruption and misappropriation of funds.  The role of the financial advisor here is thus to ensure that client’s do not fall into this rebellious trap.

Traditional investments are fully taxable (both the income and the capital gain thereof) and will therefore not assist to encourage people to save. It is therefore that TFSA’s could pose a wonderful alternative, as the only real tax it will be subject to is estate duty.There are however two factors one would need to consider. The first being the investment limits. If your clients are used to save more, the conversation will be a completely different one. As people face pressures daily, savings less might be a short term out but will have a lasting long-term impact.

The Second is almost linked to the first. TFSA’s does not force and investor with the same discipline that a retirement annuity does in the sense that they have access to their funds. History has indicated to us that people do not preserve their funds when resigning from their employment, so they are likely to access the funds of a TFSA when they are under financial pressure.

The conversation financial advisors should have with their clients is no longer one of how much to save, but to save with a long term in mind. Conversations should be of a recurring and reminding nature to ensure that clients are constantly reminded of the end goal. Financial Advisors should also consider changes to their annual client reporting. Instead of focusing on the short-term return, it should focus on the long-term goal, what it means to the client’s and why the client started their investment in the first instance.

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