Email your questions to [email protected] or fax them to 021 488 4119. This feature is sponsored by Old Mutual Wealth.
Are life-stage plans still available?
Ten years ago, I bought a retirement annuity that invested in a life-stage portfolio. The thinking made sense at the time, but I have not heard much about these portfolios since. Are they still around?
Jason Bernic, a financial planning coach at Old Mutual Wealth, responds: Life-stage portfolios are still around, but they’re not as popular as they used to be.
The life-stage strategy is based on dividing a person’s life into five different stages: accumulating, building, consolidating, defending, and extending into retirement. During the accumulation stage, the investor allocates as much as he or she is permitted to equities. The allocation to equities declines as the investor moves through the next stages. On reaching retirement, the investor needs advice on how to plan for the next stage of his or her life.
The strategy minimises the risks associated with bad financial advice; the responsibility for rebalancing the portfolio lies with asset managers. However, the strategy does not take into account that people retire at different ages or that many retirees are living for longer.
The opposite strategy, which is sometimes called “strategy for life”, is based on a person’s total expected lifespan. His or her current financial circumstances are considered in the light of his or her future goals, and a single investment strategy is modelled to ascertain the returns required to achieve these goals.
The risk of the life-stage strategy is that, as you approach retirement, your exposure to equities declines, reducing your participation in the market. But, in order to keep up with inflation and realise a reasonable return in retirement, you have to take some risk and retain a certain level of equities in your portfolio.
How should I go about paying off debt?
I’m finally taking the time to focus on my financial affairs, and one of my priorities is to settle my debt. I’ve been saving for a few years and have accumulated some cash, but I don’t know how to use it to pay off all my loans, which include a mortgage bond, vehicle finance, a student loan, a retail account and a credit card. Where do I start?
Jason Bernic, a financial planning coach at Old Mutual Wealth, responds: Start by making a list of your loans, the amounts you owe and the interest you pay on each loan. The higher the interest rate, the more expensive the debt. Re-order the list from most to least expensive; you’ll probably find that your credit card will be at the top of the list, with interest of between 17 and 25 percent a year.
Decide how much of your savings you’re comfortable using to settle your debt. Do this with two strategies in mind: to settle your most expensive debt first and to settle a debt in full. This will enable you to save on paying interest and reduce the number of loans.
Settling debt will free up your cash flow. For example, if you’re paying R5 000 a month on your car loan and you settle it, you’ll free up R5 000 a month. Take that saving and redirect it into your next most expensive debt. This will enable you to settle the debt in a shorter time. Apply the same principle using any bonuses, 13th cheques, dividends or windfalls you receive. As soon as you’re debt-free, you can channel the additional cash into investments and retirement savings.
How should I invest for five years?
I want to invest R500 to R1 000 a month. What is the best investment for a term of at least five years?
Rory Shea, a financial planner at Private Wealth Management, responds: It is difficult to respond without knowing your saving goal and how the investment will fit into your overall financial plan, taking into account your tax situation, need for liquidity, and so on. However, your first step is to determine the return you need to achieve your goal. Your return determines how much risk you have to take, which, in turn, determines the investment that is most likely to enable to you reach your goal within your time horizon.
Remember that you need to aim for real returns that take inflation into account. Generally, the longer your time frame, the more exposure you can have to growth assets (predominately shares).
It is likely that a unit trust fund will meet your requirements. An investment housed in a tax-free savings account is suitable if your time horizon is longer than five years, because the long-term capital growth is not subject to capital gains tax.
You can choose from funds that are low risk to funds that are higher risk, depending on your tolerance for volatility and the return you need.
If you are unsure which fund to choose, a good starting place is a balanced (multi-asset) fund, which provides you with exposure to a range of different asset classes, including shares, bonds, listed property and cash, at a low cost. A fall in the value of one asset class can be cushioned by the good performance of another asset class. As a result, the returns from a multi-asset fund are less volatile than those from a fund that invests in equities only.
When looking to invest money, first think about how your proposed investment will fit into your long-term financial plan and then what would be a suitable investment product and platform, considering your tax circumstances and other relevant information that may influence your bigger plan.
How are preference shares and Reits taxed?
How are income and dividends from real estate investment trusts (Reits) and preference shares taxed?
Kari Lagler, a registered tax practitioner, responds: A South African tax resident who invests in a Reit listed on the JSE is taxed as follows:
• The distributions are deemed to be dividends. This includes the interest on any debenture that forms part of a linked unit issued by a Reit. However, these dividends are not exempt from tax but are included in the calculation of your income and subject to normal tax.
• Dividends withholding tax of 15 percent is not payable. An exception is if the dividend results from a buy-back of the units or shares. In this case, the dividend is exempt from normal income tax, but dividends withholding tax is payable (unless the investor is a South African-resident company).
• On the sale of the units or shares in the Reit, the question is whether the investment was held on a revenue or a capital account. If on a revenue account, the proceeds are taxed in terms of the normal income tax rules. If on a capital account, the capital gains tax (CGT) rules apply. If the investment was held for more than three years, the proceeds are deemed to be on a capital account.
Note that different rules apply to non-resident investors, as well as to Reits not listed on the JSE.
A South African tax resident who invests in a preference share issued by a South African-resident company would be taxed as follows:
• Generally, dividends from preference shares are exempt from income tax.
• Dividends withholding tax must be withheld, unless the investor is a South African-resident company.
• Special anti-avoidance rules may apply that deem the dividend to be income (not exempt) in the hands of the recipient if the preference share constitutes a “hybrid equity instrument” or a “third-party backed share”. If the preference share was acquired through a financial institution, the full tax consequences of the investment should be made available to you. If it was not, the preference share agreement should be analysed by a tax expert so that the tax implications are understood properly.
• When the preference shares are sold, if the shares were held on a revenue account, the proceeds are taxed in terms of the normal income tax rules. If they were held on a capital account, the CGT rules apply. If they were held for more than three years, the proceeds are deemed to be on a capital account.
• If the proceeds are equivalent to the original investment, there should be no gain or loss subject to tax.
• Old Mutual Wealth provides integrated wealth planning and goal-based planning through financial planners, backed by global expertise and research. In order to create Old Mutual Wealth, Old Mutual has consolidated the expertise and resources of several established businesses: Acsis, Fairbairn Capital, SYmmETRY Multi-Manager, Old Mutual Unit Trusts, Old Mutual International, Celestis, as well as some investment consulting resources from Old Mutual Actuaries and Consultants. Strengthening Old Mutual Wealth’s position is the recent acquisition of Fairheads Trust Company.