Email your queries to [email protected] or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.
WHERE IS IT SAFE FOR ME TO INVEST?
Politically, the world seems as though it has been turned upside down, and it’s hard as an investor not to panic. Sometimes I just want to keep my money under my mattress. What is your advice? To whom do I listen? Where is it safe to invest?
Alexi Coutsoudis, a financial adviser at PSG Wealth in Umhlanga Ridge, Durban, replies: It is normal to feel distracted or distressed by the noise in the market. Predictions and assumptions are difficult to follow with certainty. All you can do is to focus on controlling your personal financial plan. Now is not a time to focus on short-term performance, but to stay true to your end goals.
You have until February 28 to put any additional money into your retirement savings pot – it is worthwhile to use the 27.5-percent tax exemption on contributions that is available to you. This will boost your long-term savings today and ultimately supports thinking long term and staying focused.
If you are unsure about anything, chat to your financial adviser for some guidance. The great thing about an adviser is that he or she is not emotional about your investments and can help you to stick to your plan in times of difficulty or uncertainty in the market.
LOOKING FOR LOW-RISK OPTIONS
I am looking for an alternative to money market funds that are low risk. What can you suggest?
Schalk Louw, a financial adviser at PSG Wealth in Old Oak, Cape Town, replies: Investors who depend on their investments for a monthly income and need capital stability rarely consider investing in equity funds and find the money market – with an average annual return of about seven percent – much more reassuring.
After tax, however, these returns no longer look quite as attractive, because they barely keep up with the annual growth in inflation, which results in many of these investors seeking comfort in income funds, to try to earn an extra percent or two in capital growth.
Income funds are usually recommended for investors with a primary need to protect their capital and a secondary need for income generation.
To protect investors against capital erosion, these funds mainly focus on the more conservative asset classes, such as the money market, bonds, listed property and high-dividend shares.
Money market investments and bonds ensure capital preservation, which is supplemented by conservative interest and coupon payments.
Property shares and high-dividend shares offer a more risky addition to a conservative income fund, but used in moderation they provide possible long-term capital growth.
The optimal mix of these four asset classes will be determined by the nature of the fund and the fund manager’s strategy, but capital growth is much more limited, compared with equity funds and balanced funds.
WILL I PAY TAX ON A LOAN TO A TRUST?
I have some money to invest in a property and I would like to loan it to a trust interest-free, so that the trust can buy the home. Will there be any tax consequences?
Willie Fourie, the chief executive of PSG Wealth Trust and Estate Services, replies: Parliament has passed the much-awaited Taxation Laws Amendment Bill after the Davis Tax Committee ’s investigation into income tax reform. Section 7C of the Income Tax Act deals with the taxation of interest-free loans to trusts. The effective date is March 1 2017.
The most material change the legislation introduces is that the official rate of interest (currently eight percent) is charged on an interest-free loan and will be deemed to be a donation by the lender. This will be subject to a donations tax of 20 percent.
However, the annual donations tax exemption of R100 000 may be deducted.
Some trusts and loans won’t be affected and, to your advantage, one of the additional exemptions is where the loan to the trust is used to purchase a primary residence for the lender.
Because your request may be for a secondary residence, it is best to obtain specialist legal and tax advice to determine whether the loan will attract the 20-percent donations tax. When doing so, also consider revisiting your original thinking behind utilising a trust in your estate plan.
WHAT CONSTITUTES PASSIVE INCOME?
I am retiring soon but intend to continue contributing to one of two retirement annuity (RA) funds. I note that an amendment to the income tax legislation allows for RA contributions to be deducted against passive income. I know that interest would constitute the latter, but would my monthly pension from the Government Employees’ Pension Fund and the drawdowns from my living annuity constitute “passive income”?
Jaco Joubert, a financial adviser at PSG Wealth in Sandton, Johannesburg, replies: From March 1, 2016, total contributions to retirement funds (pension, provident and RA funds) are deductible up to 27.5 percent of the greater of remuneration or taxable income (excluding lump sums), capped at an annual limit of R350 000. Contributions in excess of the annual limits will be rolled over to future years.
Remuneration, as defined in the Income Tax Act, consists of a general definition and specific inclusions. In the general part, remuneration is defined as “any amount of income which is paid, or is payable, to any person by way of salary, leave pay, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered”.
Among the specific inclusions in the definition of remuneration is any amount by way of an annuity, including any amount contemplated in the definition of “living annuity” or the definition of “annuity amount”. Because of this, your pension and living annuity are regarded as remuneration, from which you can deduct the contributions to your RA.
HOW SHOULD WE INVEST R2.5 MILLION?
I am 78 and my wife is 75. We shall soon receive R2.5 million when a five-year fixed investment matures.
We plan to invest R2.3 million in a fixed-deposit account that will earn interest at a rate of 10 percent for four or five years, and R200 000 in a savings account that can be accessed in the event of unforeseen expenses. We would like to save R2 000 a month from the interest. We receive a dependable income of R5 000 a month from our annuities. We have no debt. We shall need all the interest earned from the R2.5 million and our annuities to cover our monthly living expenses. Is our thinking correct, or should we do something else?
Marius Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, replies: Providing comprehensive financial advice can be difficult, because an adviser needs to know all the background information and potential future needs to create a financial plan for the future. One of the most important aspects of planning is being able to match future income against liabilities or living expenses.
While putting your investment in a four-to-five-year guaranteed fixed deposit account might provide the necessary income needed right now, the effect of inflation in coming years will erode the buying power of the interest that you earn. Your income might well be sufficient now, but might not be a few years down the road. The R200 000 that you want to place in a savings account might also not provide you with sufficient liquidity in the case of unforeseen medical or other expenses, with the bulk of your capital locked up in a fixed deposit. Furthermore, considering your ages, estate planning requirements should also be taken into account in the event of death of either you, your wife, or both of you.
My suggestion would be to contact a qualified financial planner to assist you in building an investment plan that will provide you with not only a decent return, but also with enough liquidity to weather any storm.
Note: Personal Finance will send the unedited answers we obtain to readers who submit questions. However, answers published here may be edited for reasons of space and clarity.