|
Audio Version
|
When trying to determine where and how to invest money, the variety of options and products to choose from can be overwhelming, and we often don’t know where to start.
Each investment product is taxed differently and has different advantages and disadvantages that need to be assessed.
We provide a guide that will help you match your savings needs with the appropriate investment product.
Building an Emergency fund
Ideal investment products: Short-term savings account or Money Market fund
Everyone should have an emergency fund. It should provide a “cushion”, or protection against life’s uncertainties. Quick and easy access is critical so that cash is available when needed.
Most financial planners recommend keeping the value of 3 to 6 months’ expenses in this fund.
Saving for Future Retirement Income
Ideal investment products: Retirement Funds, Tax-Free Savings Funds & Unit Trust investments
Saving for retirement is one of the most important life disciplines. Retirement funds (retirement annuities, pension funds, provident funds) provide attractive tax benefits and are specifically designed for retirement income after the age of 55.
Advantages:
- Tax-free growth
- You can claim back on tax on your contributions (the contribution you can make to claim back on tax equals 27.5% of the greater of your taxable income and gross remuneration, to the limit of R350 000 per tax year)
Disadvantages:
- You can only access savings before the age of 55 from a company retirement fund if you resign
- This access will be subject to tax for any amount above R25 000, up to 36% of the value
- After the age of 55, you can draw a maximum of 1/3 (unless a Provident fund)
- This lump sum will be subject to tax for any amount above R500 000 up to 36%
- The income you receive in retirement will be capped at 17.5% per year
- No other access will be allowed
It is important to note that retirement funds are most effective when you contribute the tax deductions you receive either further towards your retirement fund, a tax-free savings account or unit trust investment.
If you are unable to save the tax deduction you receive, it will be best to review your planning and incorporate other investment vehicles.
Goal provisions (e.g. travel, large purchases, bucket list provisions)
Ideal investment products: Discretionary Investments (Unit Trusts)
Discretionary investment accounts like unit trusts provide full access to savings which makes them ideal when looking to save for a particular goal provision in your lifetime.
Advantages:
- Unit trusts allow for full access to capital at any time.
- No limitation as to how your funds can be invested.
Disadvantages:
- Growth is subject to tax on interest and capital gains, payable out of pocket.
- Are wound up in accordance with your Will on your passing and will be subject to estate duty, capital gains tax and executor’s fees.
- The winding up of your estate can take an estimated 6 to 24 months to complete.
Saving for children’s education / long-term savings
Ideal investment product: Endowments
Endowments are ideal investments if you are looking to save for more than 5 years, with the ability to access savings once-off if needed. Beneficiaries can be nominated in the event of your passing.
Thus, these products are ideal when looking to save for your children’s education, while nominating your spouse or your child’s guardian as beneficiary in the event of your passing.
Endowments are tax efficient for those with a marginal tax rate exceeding 30%.
Advantages:
- Beneficiaries can be nominated, providing fast access to capital on death.
- Proceeds are received after tax.
- No executor’s fees will apply on death.
Disadvantages:
- Only 1 withdrawal is possible in the first 5 years.
- Endowments are taxed at 30%, which may be higher than your personal tax rate.
- If you contribute more than 1.2 x of your greatest contribution in the last two years, a new 5-year term will be triggered.
Saving offshore capital
Ideal investment product: International Wrappers
Offshore investing provides exposure to a significantly wider investment universe and protection against Rand depreciation over the longer term.
Investing directly offshore can however cause the following concerns:
- Offshore accounts may require a foreign Will and executor.
- The UK and/or US can impose inheritance taxes (up to 40%) on your capital.
- A foreign estate can take significantly longer to wind up than your SA estate or can hold up the winding up of your SA estate if you have a worldwide will or SA will only.
- Direct offshore investments are taxed on hard currency gains, converted into Rands.
International Wrappers hold the following advantages:
- Beneficiary nominations allowed, with no executor necessary – ownership of assets will transfer to your beneficiary/ies quickly after death.
- A reduced tax rate results in a 12% tax rate on gains only with no tax on interest for natural persons or SA trusts with natural beneficiaries.
- No additional US or UK inheritance taxes will apply on direct foreign assets held within an international wrapper.
- All tax is paid and reported on your behalf. No tax certificates are issued.
Conclusion
A good starting point to investing is establishing what the need may be and matching the need with the appropriate investment product.
An Investonline Financial Planner can help you determine the best product to match your needs and will provide you with the advantages and disadvantages of any particular investment product in your financial plan.
Speak to one of our Qualified Financial Planners or click here to update your Financial Plan.
