YOUR MONEY: Taxed on your adviser’s fees? We think not

Question:

Last week we featured a question by a retired reader describing how he takes a 10% drawdown from his retirement annuity to supplement his Eskom pension. 

He wrote: “I am issued a tax certificate for the amount of the monthly payment plus the broker fee. The broker must also then pay tax. 

 “Should I not be issued a certificate for the amount that remains after the broker fee is deducted as, surely, that is my income? 

“With the combining of the two amounts I am being taxed R8,000 a year … a lot for me. Being taxed only on the payment I get would drop my tax to R4,300 a year.”

 Answer: 

The reader is correct in his logic that the fees paid to his adviser should not be subject to income tax. First, it is not income in the reader’s hands, and second, the adviser would also pay tax on his fee. We have not come across this in our practice and I suspect that it may come down to the choice of product provider.

The reader is likely to be invested in a living annuity product, as a guaranteed annuity does not pay ongoing adviser fees. The product provider (the company that administers the living annuity) may have structured the product in such a way that the advice fee is paid out with the reader’s income (both are often monthly payments). This is not common practice in the industry, but there are some legacy products which may still do so.  

The reader should contact his tax adviser and see if he can claim a deduction for the advice fees, as this is not income in his hands. He could approach the product provider, via his adviser, to explain their logic. He could also approach the South African Revenue Service directly and query the logic. Finally, if he does not have the energy, time or inclination to solve the riddle, and because this is likely a living annuity product, he could consider a directive 135 transfer, and move the living annuity to a product provider which does not lump income and fees together.

If his adviser is a tied agent to one of the insurers, the reader could insist that he be moved to one of the company’s new-generation products (provided the company does not apply the same logic there). If his adviser cannot assist, he should approach an independent financial adviser who has contracts with several of the new-generation product providers and consider his options.  

The directive 135 process needs to be managed properly by the adviser to ensure that the client continues to receive income at the end of the month during the process, as this can take several weeks.   

The adviser fee appears to be significant compared with the total income (based on the information provided). The reader should review the fees he is paying.

Advice fees, like any other fee, should be priced at a level that is commensurate with the work that is being done and the level of service being offered. The industry average is about 0.75% a year, while many advisers charge 0.5% plus VAT to their retired clients. 

— Craig Gradidge, investment and retirement planning specialist, Gradidge Mahura Investments  

We want to hear from you! Send questions to yourmoney@fm.co.za