Time is such an odd ingredient in the realm of wealth creation. When treated with respect, a good amount of time can be your greatest ally. When ignored, however, time can be your biggest risk.

In a country with so much historical inequality, the idea of intergenerational wealth seems entirely mythical. However, a small amount of money sprinkled with a great deal of time makes building a nest egg for the next generation seem downright simple. By the same token, sleeping at the wheel creates an opportunity for inflation to eat away at real returns.

In this week's episode, we explore intergenerational wealth building strategies using two real world examples. Is this our cutest episode yet? You tell us.

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Mark

I have twin girls who just turned five.

I have contributed to their own respective RAs since they were eight months old. I started at R1k a month each and this contribution has increased by 10% a year. I will keep up with the annual increases for as long as possible, but I realise the contributions will become pretty large over time.

My girls have Capitec bank accounts and are registered with SARS and file tax returns. They are building up tax credits from the RA contributions in their name with SARS given they have little or no taxable income.

I realise this might not be the most tax-efficient or tax-effective option for saving for your kids and DeWet and others might disagree with it. I have outlined below why I went with this strategy over TFSA or unit trusts in their name or the plethora of additional options and combinations.

RA is with Sygnia, so it is a low-cost product, and their capital can compound tax-free over a long period 50+ years.
They can't touch it when they turn 18. I acknowledge this lack of access can be a double-edged sword given they might like it for a car, a deposit for a property, starting a business, etc.
The tax credits they are building up with SARS should see them receive some decent tax refunds when they first start working which they can use for the uses as mentioned earlier or to plough into their own TFSA or back into the RA for even more tax credits. I acknowledge I am giving SARS an interest-free loan and the effect of inflation on the tax credits is a downside here. I also recognise I am losing out on the tax credit myself.
They can keep contributing to the RA's when they start working as it is already set up for them.
Having the RA, Bank A/C, EasyEquities account, and a SARS efiling profile provides an excellent financial education base when they are older.
TFSA and/or unit trust they can access when they are eighteen, and they could withdraw everything and blow it all so this strategy guards against this. Some may see this as excessive control or control from beyond the grave, and I take their point.
This RA is their inheritance which should be substantial even in today's rands by the time they can draw down on it. Some of their inheritance they get when they are younger once the tax refunds kick in from the contributions and the balance when they are older.

There are pros and cons to the above approach compared to other kids saving options but after I weighed several different approaches and strategies, I decided to go with this one for now for better or worse.

Wesley

The lifetime limit is inflated periodically
The scheme is abandoned to inflation
The allowable limits are significantly increased (as has happened in many other countries)

If the lifetime limit is not increased periodically, the TFSA scheme is abandoned to inflation and will become worthless, much like the interest income exemption has been abandoned.

At a 4.5% midrange inflation target, assuming the original 30k annual contributions took 16.7 years to max out the 500k, the value of the 500k limit at that date will be around 240k in today's money for someone starting out on that future date. Those future starters will be proportionally disenfranchised from the TFSA scheme.

The time horizon from birth to earning enough to contribute to a tax-free account is 20 or 25 years. The optimal time horizon for a TFSA is much longer than that.

A child born now, six years into the TFSA scheme, starting their contributions at 25 years old would have lost 75% of the value of the original 500k limit. It's not a very valuable loss at that point.

I'm assuming the lifetime limit will always increase to allow an annual contribution. If not, the best possible course of action is to get in on the ground floor on this once off opportunity before it becomes worthless.

Win of the week is: Henno

Feedback for Lizl, whose company wants to force her to move her brokerage accounts in-house.

"It's always important to take a closer look at the conditions of employment in your contract on the day you started. Anything that changes after that requires a process of consultation. The employer can't make changes unilaterally. The consultation process is more than an email from HR. What typically happens is HR sends an addendum to your employment contract, none of the employees query it before signing and then it's as if the consultation happened and you accepted it. I'd argue if my original employment contract didn't include anything about this, if there was no consultation process and if I didn't sign anything, they can't enforce that rule. If they want to fire me after that, I'd go to the CCMA on the grounds of an unfair dismissal."

Gerrie

My employer is massively exposed if I were to abuse any potential privileged information to do some insider trading, either on my own accounts or within family accounts. The regulatory world has changed massively in recent years and fines from the FSCA can run into 100s of millions in addition to imprisoning my employer's directors. Banks and other institutions take this very seriously and would rather have too harsh restrictions on their employees than to allow anyone to abuse the system.

Financial institutions force all their employees to trade under a watchful eye. It's not fun, but I understand why.

I informed my employer's compliance team of all my and my family's accounts at EasyEquities and I told them I have no desire to move it. Turns out the process was slick and simple. I only buy ETFs at EasyEquities and never individual shares. My purpose is to invest and not to trade and ETFs fall outside of the trading restrictions. I made a declaration to that extent and the compliance team told me to happily continue doing so. They may ask me for a statement from time to time and I'll gladly supply it, but there is no need for any ongoing burdensome process.

The entire process took me half an hour to resolve. I made full disclosure. They are aware of my accounts and my or may not check up later. I have undertaken to inform them the moment I intend doing anything other than investing in ETFs. I prepared myself for much pain that never happened. So Lizl– my experience was that there was no need to move accounts and trigger capital gains events. What a relief.

Koketso

I started looking into my investments and was horrified that:

- My EAC was sitting around 2.45%; 1.15% of which was advice fees

- The general performance of my investments in the last 3 years was not great and with the 2.4% in fees I practically kept money under my mattress and all that prudence was for nothing!

What I have done so far is:

- Got rid of my financial advisor dropping 1.15% of fees from my EAC

- stopped contributing to my RA as I have intentions to move abroad in the next 2-5 years

- Moved funds from the more expensive products to a global feeder while I figure out what to do

I recognise that this is not ideal, but this was a first step and one step at a time!

And the questions:

For my global money, I would like to invest most of my USD abroad (not using any local platforms) and in ETFs. Do you have any recommendations?

I understand that from an estate planning perspective, Switzerland recognises SA wills should anything happen
Before I fired him, my financial advisor recommended two products, the first with the above in mind:

the Galileo balanced fund which has fees of 2%+. I must mention here that the advisor works for Galileo so I was not 100% sold on this idea.
the nedgroup investments core global fund, details also attached
For my local money, again I am all in for ETFs and would also want to look at moving away from my expensive platform.

- If I wanted to say move to a cheaper provider, how do I actually do that? Would there be CGT on my unit trust and TFSA?

- I am thinking the following for my ETFs

TFSA: 50% ashburton 1200 ; 50% MSCI world
Unit trusts: 50% - ash...

Intergenerational wealth (#236)

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