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YOUR QUESTIONS ANSWERED

By Readers Letters Time of article published Apr 1, 2020

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INVESTMENT FUTURE 

I’ve lost a significant amount in my investments over the past month. What do I do now?

Name withheld

Anet Ahern, the chief executive of PSG Asset Management, responds: The Covid-19 market panic has seen indiscriminate selling as investors scramble to reduce risk and raise liquidity. Some headlines have referred to a “bloodbath” on the stock market. Few shares have escaped unscathed, and even some of the traditional safe havens, such as gold stocks, have been punished.

There is no denying that locking down countries and self-isolating within society have a brutal impact on both economic demand and supply. Many industries are going to suffer significant declines, and company profits will be hit hard during the months ahead. The impact on employment and society will be equally severe.

It is, however, reasonable to expect the economic downturn to be predominantly felt this year, and I believe economies and markets should recover swiftly.

Central banks and governments around the world are embarking on aggressive interventions to both stabilise and stimulate their economies, particularly in troubled sectors like banking and tourism.

The South African Reserve Bank has cut rates and may do so again if necessary in the months ahead. Our economy should be somewhat cushioned by lower rates, as well as the collapse in the oil price, both of which provide consumers with welcome spending power.

Times of panic can result in emotional responses, and these can have devastating long-term consequences. Our greatest fear is that investors will fall prey to fear and capitulate by selling stocks at these low levels. In fact, we believe, depending on an investor’s overall exposure and risk profile, that now could be the time to buy judiciously, increasing exposure to risky assets: a case of being brave when others are fearful.


VOLATILITY 

I have read a lot recently about volatility as an indicator in stock markets, particularly with the Covid-19 virus making headlines, but I don’t really understand it. Can you explain?

Name withheld

Schalk Louw, a Wealth manager at PSG Wealth Old Oak, responds: Volatility is not a directional indicator, but a measure used to express changes in pricing as a percentage. If share A’s price rises from 100 cents to 101c, it indicates a positive change of 1%. If share B’s price moves from 200c to 198c, it is seen as a negative change of 1%. The volatility ratio (VR) of both these shares is the same (1%); therefore the VR of share A is equal to that of share B.

So, volatility doesn’t tell you whether the market is heading up or down, but the VR can be used to determine the risk of a particular investment. When an investment in a particular share, for example, has a VR of 20, it means that the investment has already moved up and down by 20% during the period in question. This means that if you do decide to buy this share, you have an opportunity to grow your investment by 20%, but you also risk losing 20% of its value.

Emotions play a big role in decision-making during times of high volatility, and investors tend to force markets to levels well below fair value. This presents opportunities for future growth.

In times of low volatility, on the other hand, investors are so confident that the market will not drop that they force it upwards - a lot like the market has behaved during the past 12 months. An unexpected event, such as the Covid-19 outbreak, can turn this on its head.

Before making any decisions during times of fear or heightened emotions, be sure to check in with your financial adviser.


RETIREMENT 

I am 67 years old and in retirement. Can I still take advantage of the 27.5% allowance as a tax deduction? How and when will I have access to the funds so acquired?

Name withheld

Dulcie Weyks, a financial adviser from PSG Wealth Pretoria Irene Sovereign Drive, responds: Retirement annuity (RA) payments do not have an age limit. Contributions can be claimed for tax at any age, and tax certificates for each contributor will be issued by the RA provider.

The 27.5% allowance is based on your annual taxable income (limited to R350000). This can include income from various sources, including annuities and rental properties.

Please note that liquidity restrictions will apply. You are allowed access to your RA any time from the age of 55. The following options are available once you formally retire from the product:

* If the fund balance is below R247 500, the full amount may be withdrawn as a lump sum but will be subject to tax.

* If the fund balance is more than R247 500, up to one-third of the investment may be withdrawn as a lump sum. The remaining two-thirds must be used to purchase an annuity or pension income.

* If you do not need to withdraw a lump sum, the full amount may be used to purchase an annuity.

Any lump sum withdrawal will be taxed on the special retirement fund lump sum benefit table. The first R500000 is tax-free. The R500000 could, however, be reduced as a result of various lump sums or severance benefits you’ve received in the past. Tax on lump-sum benefits are calculated cumulatively over your lifetime and will be aggregated. The tax is calculated on the actual lump sum taken and not the fund value.

The pension or annuity that you would receive from the compulsory annuity is deemed to be normal income. This, together with any other income you earn, will be subject to income tax.

There are a variety of compulsory annuity options. I suggest that you consult a qualified financial adviser to assist you with the various choices and any impact this may have on your personal situation.


INSURANCE 

Can my life policy and retirement annuity have the same beneficiary?

Name withheld

Willie Fourie, the head of trusts and estates at PSG Wealth, responds: You can nominate whomever you wish as the beneficiary on a life policy, but this is not necessarily the case for retirement products that fall under the ambit of section 37c of the Pension Funds Act. In these cases, trustees of the fund must first ensure that any dependants are catered for before nominees will be considered.

There are specific legal provisions and formulae that funds apply in deciding on how assets are allocated. Nonetheless, it is essential to ensure that your list of nominated dependants and beneficiaries remains up to date as part of your annual estate planning review.

The correct use of beneficiary nominations on policies ensures a truly robust financial and estate plan. It’s also important to dispel any misconceptions, so you can prepare properly before it’s too late. Working with a fiduciary adviser goes a long way to ensuring you’ve considered the bigger picture.

PERSONAL FINANCE 

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