Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

There are two elements to this question: convenience and costs.

Convenience

Investing through a platform has a number of advantages:

• All your unit trusts are on one platform, so it is easy to buy and sell your investments. You can cash in all your units in one unit trust and invest the proceeds into several others with the click of a button.
• You get a consolidated view of your holdings so you can see what your exposure levels are to different asset classes.
• You have easy access to a wide range of other investments such as specialist unit trusts, hedge funds, exchange-traded funds and passive investments.

Costs

The downside of using a platform is that there are additional costs. Because the platforms place a lot of business with various asset managers, they get wholesale pricing. 

I looked at investing in one of the more popular unit trusts and got the following result:

• Investing directly attracted a fee of 0.78%.
• Investing via a platform attracted a wholesale fee of 0.53%. You get a saving of 0.25% by investing via a platform, but you must add the platform fee to this.

The platform fee depends on the size of your investments and the size of your financial adviser’s book of business on the platform. These typically range from 0.2% to 0.5%. If you are a small investor, then going via a platform will cost you an additional 0.25% and if you are a larger investor, you could save money by going via a platform. 

Insider tip

If your marginal tax rate is more than 30%, you could use some of the product structures that are available on the platform to your advantage. You are able to wrap your unit trust investment in an endowment or sinking fund structure.This has the following advantages:

• You save tax, because inside the wrapper a tax rate of 30% is charged.
• You save on executor fees of 4.025% because you can add a beneficiary to the investment.

I did a calculation for a client with a 41% tax rate where it was cheaper to invest R5-million through an endowment structure than directly into a unit trust. Add in the additional R200,000 saving in executor fees that you will get as you can attach a beneficiary, then it certainly makes sense to consider using an endowment.