The Ninety One Investment Platform recently hosted two further Masterclass sessions (17 and 18) as part of series 5.
As a business, we remain focused on assisting advisors in tackling the challenges associated with intergenerational succession planning within an aging client base. Series 5 contained a number of powerful examples to demonstrate how product structure and platform functionality can help turn this threat into opportunity while providing direct benefit to the families who have appointed you as custodians of their wealth.
The topic of session 17 was “How platforms enable great outcomes for high-net-worth individuals and their families”. We highlighted the top ten concerns that clients need their financial advisors to address.
In this summary, we briefly touch on some of your clients’ concerns, but our recording of the series contains detailed solutions to these burning issues.
Both local and offshore discretionary investments generally form part of the estate of the investor when they pass away. This means that on their death, the Master’s Office needs to appoint an executor as per the investor’s wishes indicated in their will. The executor then needs to read the will to highlight to the various product providers what to do with the investments at the time. Winding up the estate can be a lengthy process, and this can put beneficiaries in a difficult situation, especially if some of them need the proceeds to cover their living costs. Because this process can take a long time, investors need to ensure that there is at least 12 months’ worth of income in the hands of the remaining spouse/ beneficiary to live off while the estate is being wound up.
Fortunately, there are discretionary investment vehicles like policy wrappers that allow for beneficiary nominations (primary and alternative). This helps to circumvent the lengthy process described above – on condition that the nominated beneficiary is alive at the time of the passing of the investor. Our platform offers the Ninety One Life Portfolio (local) and the Ninety One Global Life Portfolio (offshore). These product structures not only help to speed up the process of paying out proceeds, but also give the beneficiary the option to continue with the ‘matured’ policy in their own name. If the beneficiary decides to have the policy paid out, the proceeds will be received net of 12% capital gains tax, which will be deducted within the policy. Where the beneficiary elects to continue with the policy in their own name, it will be a capital gains tax roll-over event (CGT neutral). Because there is a nominated beneficiary, no executor fees are payable, and the product provider (Ninety One in this case) will approach the beneficiary directly without the assistance of the executor.
You may think that the above product structures are only earmarked for market- or share-related investments, but this is not the case. Investors are increasingly making use of these local and offshore product structures as a ‘shelter’ for their excess cash, tapping into the benefits these products provide. There is a lot of cash sloshing around the system. We currently estimate that investors hold approximately R1.6 trillion in bank deposits, which is nearly double the long-term average. This creates opportunities for advisors to assist their clients in managing this money more efficiently. During session 17, we also showed that moving cash from bank accounts into product structures can create better outcomes for clients – net of fees and taxes.
For example, when holding cash in the bank in their own name, a 45% marginal tax rate applies to high-net-worth individuals and trusts, versus a tax rate of 30% that applies when invested in a suitable policy structure. Investors who have a longer time horizon can also make their conservative investments work harder, as illustrated in Figure 1.
Figure 1: Providing a tax-efficient solution for cash in the bank
‘Lazy’ cash sitting in bank accounts
Ninety One Life Portfolio (local)
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
|---|---|---|---|---|---|
| Cash (repo rate) | R 10 376 250 | R 10 766 656 | R 11 171 752 | R 11 592 089 | R 12 028 241 |
| Ninety One Money Market (policy) | R 10 585 200 | R 11 204 646 | R 11 860 342 | R 12 554 409 | R 13 289 093 |
| Ninety One Diversified Income (policy) | R 10 685 300 | R 11 417 564 | R 12 200 009 | R 13 036 076 | R 13 929 438 |
Source: Ninety One. Using current fund yield for illustrative purposes only, fund return will vary over time and some capital volatility may also exist. A platform fee of 22 basis points and an advice fee of 25 basis points are built into money market and Diversified Income illustrations. Yields as at 31 March 2023.
During session 17, we also focused on Section 10C of the Income Tax Act dealing with over-contribution to retirement funds. We discussed various scenarios, looking at strategies advisors can employ to benefit not only the main investor but also their spouse. For example, instead of only the main member contributing to a retirement annuity (RA) and then drawing an income from a living annuity (ILLA), both the main member and spouse can enjoy the tax benefits of having their own RA and ILLA. Not only do their investments grow tax-free in their RAs, but they also have the opportunity to reduce the impact of tax on the income they draw from their own ILLAs, depending on previously disallowed contributions. We illustrated how spreading the benefits between spouses can help to reduce the taxable income (separate PAYE tax tables) in the hands of the principal family member. ILLAs also offer estate planning benefits as beneficiaries have the option to continue with the ILLA. Under such a scenario, the ILLA would be excluded from the estate and no estate duty would be payable. Clients can further benefit from family pricing on the Ninety One Investment Platform, paving the way for intergenerational succession planning. Ninety One Family Office provides an opportunity to bring other family members into the advice net and maintain cost efficiency.
Trusts have been a popular vehicle to protect assets for the next generation. But since the introduction of Section 7C of the Income Tax Act, it has become a challenge to transfer both local and offshore assets into trusts without incurring punitive taxes. For example, a client (connected person) who makes a low or interest-free loan to a trust will generally be subject to donations tax. (There are some exceptions.) It is possible to reduce a loan account over the lifetime of the founder, for example, by donating up to R100 000 each year to the trust, without attracting any donations tax liability. The balance of the loan account will be included in the founder’s estate when they die. Unfortunately, time is not always on the side of clients, and they are not able to reduce the loan account meaningfully during their lifetime. In our Masterclass session 17, we examined alternatives to the loan account. For example, product structures that allow for a nominated beneficiary make it possible for a trust to inherit discretionary assets from the investor, without incurring CGT or executor fees (e.g. Ninety One life portfolios). There is also the added benefit that these assets will not form part of the individual estate of the beneficiaries of the trust.
Investing offshore can be a complex process, with a myriad tax, estate planning and regulatory issues to consider. We concluded session 17 by looking at what we call the ‘wall of worry’ when investing offshore. Apart from identifying suitable underlying investments that meet a client’s personal circumstance and risk profile, there are other key factors to consider when investing offshore. Figure 2 clearly illustrates the importance of the product structure you choose to address many of these worries. We assessed an investment in the Ninety One Global Life Portfolio where the policyholder’s spouse inherits the asset, versus an investor making use of a discretionary offshore investment (without a policy wrapper) whose spouse inherits the investment. Figure 2 shows that having the correct product structure in place can remove many of these worries over the lifetime of a client and after their death.
Figure 2: Offshore ‘wall of worry’
| Global Life Portfolio | Married (discretionary) | Single/widow/er (discretionary) | |
|---|---|---|---|
| Income tax | N/A | 45% | 45% |
| CGT on disposal | 12% | 18% | 18% |
| Protect from probate | ? | ? | |
| Protect from estate duty | *** | *** | 20/25% |
| GCT on death | N/A | N/A** | 18% |
| Save executor fees | |||
| Liquidity on death | |||
| Flexible benefit options | |||
| Protect from situs | * | * |
Source: Ninety One.
*Where situs assets are held ** Where the benefit is passed to the spouse *** Where the benefit is passed
to the spouse.
Session 18 was all about building a financial plan for a client that addresses their top ten concerns. We also introduced Masterclass Pro to our audience. This feature session will include various industry experts on a range of complex topics, which we trust will provide valuable insight to our advisor partners and us. I am reminded of the Chinese proverb: “Learning is a treasure that will follow its owner everywhere.”
Happy learning!