# Podcast: What’s the deal with tax brackets?

In Latest, The Fat Wallet by Kristia van Heerden

For the longest time I thought a progressive tax system referred to how we spend our tax money. Poor, naive me. It turns out that a progressive tax system means there’s not one tax rate. How much tax you pay depends on how much money you make. Your tax rate gets progressively higher as you earn more income. In a way, you pay less tax on the money you make first.

The table below shows how your income is taxed. Unless you’re in the lowest tax bracket, you’ll notice a rand amount before the percentage you pay on your salary. When you multiply the highest amount in the tax bracket above by the corresponding tax bracket, you get to that rand amount. In other words, all the money you earned before you got to your current bracket is taxed at a lower rate.

A good way to think about this is by allocating a lower rate to the money you earn first. Let’s say you earn R423,000 per year. This puts you at the upper end of the 31% tax bracket. However, since tax is progressive, you actually only pay 31% on everything above R305,850. In other words, you only pay a rate of 31% on R117,150, not on the full R423,000.

If you earn R423,000 per year, you earn R1,185 for every day of the year. Your first R195,850 is taxed at 18%. For the first 165 days of the year, your tax rate is therefore 18%. We got there by dividing the upper end of the first bracket by your daily income. For the next 92 days, your tax rate is 26%. The last 96 days of the year brings your tax rate is 31%.

At this point you might notice there are 12 missing days in your year. Those are the 12 days the government gives you for free. Neat, eh?

It’s good to know the upper limits of your income tax rate, because income from interest or rental income gets added to all your other income and taxed accordingly. This affects your investment choices. If you notice that income from your investments might push you into a higher tax bracket, you can start making choices that might be more tax-efficient in the long run.

Win of the week: Chris

Please tell fellow SA’ns traveling abroad, that the Revolut App is amazing.

You can transfer money into a wallet for 1.6% flat rate and from then on you pay zero fees.

You can also order a card for around R80 , but if you have Apple Pay it’s not necessary as you can just link it.

You pay zero fees per transaction and get really decent conversion rates. It’s much cheaper than any SA bank I’ve ever used.

Martina

I have resigned from my job and October was my last month. I have been offered a scholarship to study overseas in Italy for six months. I have a small side hustle but will not be earning a stable income whilst I am abroad. I have no guaranteed job to come back to. However, I don’t plan on going back to a corporate environment again.

My work will pay out my pension fund which is through Momentum Funds At Work (which has not performed well in the last 2 years). Is it best to put my pension in a preservation fund or an RA?

My understanding is that preservation umbrella funds should carry lower costs / fees than preservation funds and retirement annuities available to individuals, but  the Momentum preservation fund fees are 0.76%. and Sygnia Skeleton Retirement Annuity fees are only 0.65%.

I’m not sure if there are hidden fees and what the advantages are of putting it in a preservation fund vs a RA, besides being able to draw from a preservation fund before 55 as opposed to after 55 for an RA.

Charmaine

I heard that you can transfer your annuity from one provider to another for a fee of R650 or something.

I don’t know if this is for living annuities only. If one has a RA with those money grabbers, there are high penalty fees.

What are the options? Shall one turn it into a living annuity and then transfer it?. Shall one draw 17.5% just to get the money out. I think if the value is less than R247,000 you can take all the cash, with obvious tax implications

What are one’s options if you are stuck in an expensive retirement annuity?

Frank

I too have been looking for an offshore investment broker and was looking at Degiro as well. I just wanted to share that unfortunately there have been recent changes in regulations in the EU which resulted in Degiro now requiring its clients to have both an EU bank account and be resident in the EU. That said all existing non-resident clients can remain clients. So it looks like the door on EU based brokers is solidly closed and I’ll have to start looking at US investment brokers instead.

Marco

We’re currently putting at least R10 000 extra into our bond access facility. This is also essentially our emergency fund. At current projections, we should get the house paid off by late 2023.

My plan is to essentially arbitrage the interest on my house debt (8.9%) to fund a Tyme bank account that earns up to 10% interest.

The plan would essentially be to stop paying R10 000 extra into the bond, but put it into 10 day notice Tyme bank account. If we started with what we have currently saved up, and put in 10K a month from now, we should reach 220K around early-mid 2021 with monthly compounding, and then it should start paying ~23K a year in interest.

Once this is achieved, resume paying the 10K into the bond as before, except now we have 23K a year extra to put into the bond, or an emergency fund that pays for 2/3rds of a TFSA every year (hopefully they increase this amount). If we put the 23K extra a year into the bond, we’ll pay off the house by mid 2025(July 2025 ish), around 18 months after if we had just put the 10K a month into the bond.

The argument could be made that we can pay the bond off earlier (end of 2023), but then we’re left with no emergency fund at the end of 2023, and have to essentially build it up. The 10K plus the extra money freed up by not having bond payments would build it up faster, and assuming Tyme has the same 10% account, to build up the emergency fund to 220K(probably higher with 6 years of inflation to add to living costs) would take around 12 months.

Also, since my partner and I are married, double interest exemption can be gained per year eventually for the emergency fund. Although we really only would need around 220K for a 12 month emergency fund, so not enough to attract interest and dividends tax–we have no other interest earning amounts.

I know the adage, “time in the market is better than timing the market” holds true, and this plan would limit our RA contributions and TFSA allocations for a year or two, but the payout would be a chunky enough emergency fund that pays 10% p/a and would contribute 2/3rds of one of our TFSAs–not bad for an emergency fund.

Pieter

Do I need exposure to local equity?

Assuming a 100% equity ETF portfolio, are there benefits to holding South African stocks in addition to global index ETFs? I know that the JSE has historically outperformed world indexes, but there is no guarantee this will always be the case.

I am not pessimistic about SA, but I want to be optimally diversified. I am already invested in SA by virtue of the fact that I earn and save Rands. Is there a reason to put those Rands into South African stocks, other than to bet that the JSE will outperform the rest of the world?

Marvin

I am a bit stumped and need some guidance.

My dad has finally reached retirement age 65, however, does not have sufficient funds to sustain my mom and himself through their life. He does do the odd job by this is not regular and cannot plan based on this income.

I’ve assisted them in paying off their flat (Current Value R 750,000) so all they need to cover is lights, water, rates and levies (R2,500.00). We have gotten their total living expenses down to R8,000 pm.

My dad’s RA is worth R 175,000.

His pension is worth around R600,000. When my dad lost his job 8 years ago, we stopped contributing to it as the odd private jobs he did went to living expenses and I felt it would be better they pay off their flat.

My dad is expecting an inheritance of ±R100,000.

They are both currently receiving a pension grant from the government.

Thankfully they are both still healthy and as kids, we have them on a very basic medical aid.

I really need guidance as to what I should do now without putting their pot at financial risk.

My plan is as follows:

•         The flat is a large part of their retirement source and needs work done to the place. If we were to sell it in the future or rent it out, we would need upgrades. The plan is to use half the inheritance to upgrade and invest the balance. (At this point, I have no intention of selling the place, as they still need to live somewhere).
•         Regarding the RA and pensions, my dad is keen to take the 3rd, but will this still be tax effective or even worthwhile?
•         If we take the 3rd, we would then take a living annuity out for the balance, and invest the 3rd and balance of the inheritance (50k) in The SATRIX World ETF and only use this when the living annuity runs out. Else I saw Africa Bank is offering 10.75% on a R100k deposit for 6 years. This works out to an effective interest rate of 13.33% due to compounding.
•         Do I invest the 3rd and inheritance in a TFSA?

Tim

I have a query based on being penalized 40% by Sars for transferring equities and money from SGB to easy equities within the TSFA ring fence environment.

I was under the impression account transfers were tax free (we didn’t withdraw the money and re-deposit)

Has anyone else suffered this injustice?

We have disputed it with SARS and have asked easy for help in the interim.

Would be nice to know if we are a first or if the community has had similar issues.

Lungi

I started listening to the podcasts two weeks ago and I pretty much listen to you guys all day, every day: at work, at home and while I’m jogging 🙂

One thing you have brought to my attention that wasn’t even on my radar was the fees issue on my investment products. And boy did I get the shock of my life!

I’m currently contributing to an RA with Liberty and I have one with Old Mutual which I don’t contribute to anymore.

I also have a Pension Fund Preserver Policy with Liberty (which is currently invested over 4 investment products each with its own management fee).

This afternoon I decided to look through my statements and found that I was being ripped off in fees for the current RA that I am contributing to.

I currently contribute R535 premium and according to my calculations for September 2019, after the monthly fees of R321.20 (over 2 investment products), only R213.80 actually goes into the RA. So basically, 60% of my premium goes to paying management fees. This is a very poor investment.

1. Will I be able to consolidate all my RAs and Pension Fund Preserver into one product so I can pay one management fee. Or is it better to diversify?
2. I can only currently contribute R500 to an RA – looking at the fees charged by the companies, am I better off putting that money elsewhere till I can afford to contribute more? like in my Easy Equities Investment Account? Will other RA companies be able to get me a better deal than the one I currently have?

The Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com.

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