What happens if a financial adviser doesn’t perform a tax directive simulation on a client’s half before they withdraw funds from a retirement vehicle? Wouter de Witt of Gravitas Tax explains.
What Happens When You Exit a Retirement Fund?
When you exit a retirement fund – which can occur when you retire, resign, are retrenched, emigrate or get divorced – a tax amount will be payable to the South African Revenue Service (SARS).
In the case of retirement and retrenchment, clients may have to settle debt, and an emergency fund may be critical. In addition, if clients are retrenched, there could be uncertainty as to when they will once again be gainfully employed.
It is therefore critical to have an idea upfront of how much tax is going to be deducted from the lump sum in the fund. This calculation will leave a client with a net amount, from which it is possible to decide how much to withdraw for their immediate needs, for example, paying off debt, or sustaining a living for a couple of months.
What is a tax directive simulation?
Tax directive simulations only came into effect in 2019, meaning this is a relatively new concept that many advisers and their clients are unaware of. The simulations provide an estimate of what a client’s tax would be if a withdrawal was made from the fund.
They are not calculations that can be carried out by advisers alone, as they generally do not have all the information related to a client’s tax situation at their fingertips.
What Influences the Tax that a Client Pays When Exiting a Retirement Fund?
The tax that a client is going to pay when exiting a fund depends on many factors, including:
- Whether a client previously withdrew funds on resignation or retrenchment;
- The length of time applicable – at retirement, a client may not remember all the instances of withdrawal, when these took place and why; and
- What tax tables are applicable in each case and
- If the client’s individual taxes are up to date and if not an IT88 will be indicate
These factors make it extremely difficult for an adviser to make an accurate calculation on behalf of a client.
Enter the tax directive simulation, which can accurately simulate the tax payable by a client, based on all their previous withdrawals recorded by and available from SARS.
Why is a tax directive simulation important?
This tool helps to give you an idea of the tax you’re going to pay in advance, where there is debt to settle. Also, there’s, unfortunately, no going back once a client proceeds with a withdrawal from a fund.
Say, for example, a client wishes to take out R500 000 on retirement and their adviser estimates – without performing a simulation – that there’s going to be nil tax payable. The actual withdrawal takes place and SARS deducts the tax that they deem necessary. If there is, for example, an additional R100 000 to be deducted, for which the adviser didn’t account, there’s no way back. That R100 000, for argument’s sake, will be deducted by SARS and the client will receive only R400 000, instead of the expected R500 000.
When is the Tax Simulation Critical?
The simulation is critical when there is debt to settle on retirement, as the adviser can show the client how much tax will be payable. This will allow the client to alter the amount they were hoping to withdraw from the fund – say to R600 000, in advance of the withdrawal taking place, to accommodate the R100 000 in tax payable to SARS. The client will therefore be able to receive the R500 000 they were counting on as a net amount.
The Role of the Financial Adviser When it Comes to Tax
The adviser’s role is to let their clients know about the availability of tax directive simulation, and to advise them about the information that the simulation elicits, to avoid any difficult or unexpected situations on withdrawal.
While there are financial services providers that offer tax directive simulations within the industry, they usually limit their advisers to one simulation per fund on behalf of a client. This is a fairly manual paper-based process, and it can take up to a week for the results to come through.
A client may have funds invested in different vehicles, at numerous firms, but a particular financial services provider can only do a simulation on behalf of the monies lodged with them, say R500 000. They cannot allow for the funds amounting to R3 million in total, for argument’s sake, which are lodged elsewhere in the retirement funds of other firms.
Speed and efficiency reduce the stress
Gravitas Tax offers tax-directive simulation as an online process. It is not provider specific, and takes into account the full retirement amount that the client has saved and/or invested. In terms of retirement, it is possible to request multiple simulations, and it takes only two to three hours to generate the simulation and send it back to the client in question. This makes it an extremely efficient process compared to what that client may experience elsewhere.
The question to ask, then, is whether your adviser is making use of this vital simulation process on your behalf. If a client chooses to retire without this information, their adviser has carried out financial planning on their behalf in a blindfolded state, so to speak, without providing the client with the industry-know how they need to make an effective decision.