Pundit Poser: Are tax-free investment schemes another fee-generating scam?

In Pundit Poser, we ask experts to answer questions posed by the Biznews community. If you have a question, please email it to me (alec@biznews.com). Ken Ireland says he likes the focus on man-in-the-street problems and sent in the question below around tax-free investment schemes.

Our colleague, financial planner and go-to expert on personal finance, Candice Paine, sank her teeth into it. Candice is a CFA who left the corporate life to work for herself and help her clients weave their way through the financial planning maze. – Alec Hogg   

Ken Ireland writes:

How can we invest maximum R 30 000 p.a. in tfsa scheme when industry insists on taking its fees from inside the scheme? They insist they cannot accept it separately, or take it out of the funds being moved (obviously too complex for people in the finance world to manage).

Another example of the industry’s attempts to hide the actual amount, as apposed to quoting percentage off-take?

Candice Paine responds:

National Treasury’s tax-free savings account (TFSA) initiative is essentially to allow people to grow their capital free of tax i.e. dividends withholding tax, capital gains tax and tax on interest income. This is a tax-free product and not a fee-free product.

The Government only allows certain products to qualify as a TFSA, a collective investment scheme (unit trust) being one of them.

As per usual, the product provider the underlying fund manager as well as any administration platform (i.e. a LISP) still needs to be funded. Government has however prohibited asset managers from offering funds which have a performance fee from being part of the suite of funds available to invest in for your TFSA.

The funds offered as part of your TFSA are collective investment schemes which pool the assets of many investors together.

Invoicing and collecting fees for these funds outside of the fund would simply be too costly for the management companies to administer and would probably result in pushing up the costs of these already pricey products.

Even though these costs are charged “inside” the fund, the impact is quite transparent (as required by the industry body) and reflected in the Total Expense Ratio (TER), which is published for every fund.

Read also: Matthew Lester: I’m not putting my money into tax free savings accounts

In an attempt to minimise fees on your underlying investment, choose index tracking funds or ETFs bought from a low cost platform.

Also, invest directly through a management company rather than going through an administration platform. This way, you may save on total fees too.

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