PLANNING POINTS
By Ryan McCaughey
The local and international investment environment is particularly complex. It subjects investors to a myriad of alternative investment products and structures that invest in a broad range of asset types, each of which have very specific risk, return, term, taxation, and regulatory and legal characteristics.
This month, I’ll focus on investment tools generally available to a South African investor to enable them to build an optimally structured investment portfolio.
There are five key areas of focus:
1. Understanding your risk tolerance.
2. Optimal investment term and return expectations.
3. Establishing an investment portfolio that is optimally structured, taking diversification and costs into account, and structured to avoid unnecessary taxes while considering all regulatory and legal characteristics.
4. Implementing your investment structure.
5. Reviewing your investment structure regularly and making changes where necessary.
Investment tools
Identifying an investment vehicle (tool) that suits your need can be a daunting task. Each vehicle has its own set of benefit and/or constrains that will need to be carefully considered for it to meet your needs. Key is not to consider your investment choice in isolation but to rather view your longer-term plan and how your investment decision complements the ultimate goal.
Generally, within the local financial services industry, you will have access to invest in the following investment vehicles:
Savings account: A savings account comes in many forms - generally it is a low-risk investment offering the investor cash-like returns with immediate access to funds. It can also take the form of a notice savings account that offers a higher rate for reduced immediate access to your funds. The interest earned is levied at the investor’s marginal rate subject to relevant exemptions and exclusions where applicable.
Investment portfolio: An investment plan involves having a flexible and accessible investment portfolio that can be tailored to your individual needs and risk tolerance through investment in a wide range of investment solutions. Investment solutions include unitised investments with options to invest in a combination of active and passive managers, share portfolios and exchange traded funds. Income and capital gains tax is levied at the investor’s marginal rate subject to relevant exemptions and exclusions where applicable.
Tax-free savings account (TFSA): A TFSA provides South African investors with an opportunity to save towards a specific goal or supplement their retirement savings within a flexible, tax-free investment solution. All investment returns (interest, dividends and capital gains) within the product are completely tax-free. Currently contributions are limited to R36 000 per year with a lifetime limit of R500 000.
Retirement annuity: This is a savings vehicle that enables tax-efficient savings for retirement. It provides natural persons with the ability to enhance their retirement savings by permitting a tax deduction for retirement contributions and also provides the benefit of totally tax-free returns within the fund. The total contributions to retirement funds are deductible but limited to 27.5% of the greater of remuneration or taxable income, before the deduction of donations, capped at an annual limit of R350 000. Any excess may be carried forward to the next tax year.
Endowment: An endowment is a tax efficient investment vehicle that is appropriate for investors wanting to invest large sums of money and who have high marginal rates of tax. All taxable income generated within an endowment is taxed at an effective rate of 30% and all capital gains are taxed at an effective rate of 12%.
Inflation remains a key risk
Given the current economic cycle, it’s important to prepare for an inflationary environment when considering your investment choices. Five key points to consider are:
1. Asset allocation is key.
2. Pricing power is important when identifying companies to invest in.
3. An inflationary environment affects real returns.
4. Avoid market timing.
5. Being long-term focused is key.
A Certified Financial Planner (CFP) professional is a partner who is well versed in the financial services industry and can assist you in identifying and constructing a suitable cost-effective investment structure that meets your required needs and one that is reviewed regularly.
Ryan McCaughey CFP is a director of Hewett Wealth and the Financial Planner of the Year 2021/22.