A Fin24 reader asks:
I want to invest R500 a month in a tax-free investment. What
is an option?
Christo Terblanche, head of product development at Allan Gray,
Most investors are still better off in a retirement annuity
(RA). Also, investors who do choose alternative products forgo the key benefits
offered by RAs, ie tax efficiency and protection of their retirement savings.
One of the biggest advantages of RAs is that you may pay
less tax or you could receive money back from the South African Revenue Service
at the end of the tax year.
If you contribute to your employer's pension or provident
fund you can also contribute to an RA. You are allowed tax deductions on RA
contributions of up to 15% of any additional income that is not used to
calculate your pension or provident fund contributions, such as a bonus, car
allowance or commission.
If your employer does not offer a pension or provident fund,
contributions of up to 15% of your full salary are tax deductible. Income
earned on your investment over the time up to when you retire is also tax free.
At retirement you will need to transfer at least two-thirds
of your investment into a pension-providing investment product. The income
payments you receive will be taxed at your marginal income tax rate, which is
often lower after retirement.
Another reader asks:
I would like to start investing, but I am not sure what to do.
My start-up is a lump sum of R5 000. I have heard about systematic investing.
What are the advantages of this approach compared to investing a lump sum?
Heather Robertson, a consultant at Blink Consulting,
Systematic investing is the principle of investing a fixed
amount of money at regular intervals (eg monthly) over a long period of
time. Or if you have a lump sum to
invest, it is choosing to phase into the markets over several months.
Systematic investing is especially useful when it comes to
investing in equities. While it is very important to have a diversified
portfolio, equities are key to ensuring a long-term hedge against inflation.
Provided that you do not have to withdraw from your
investment in the short term, you would do well to keep a large portion of your
investment portfolio in good quality equity investments.
The key advantage of systematic investing is the principle
of rand cost averaging. As shares (equities) are volatile in nature and their
prices change on a daily basis, there is an investment risk associated with
investing in equities.
This risk can be greatly reduced by accumulating wealth over
time through a regular fixed monthly investment.
So while the amount of money invested monthly remains the
same over time, the number of units purchased varies based on the market value
of the underlying shares.
When the stock markets are up, you buy fewer shares per rand
invested due to the higher cost per share. And when the markets are down, the
situation is reversed and you purchase a greater of number of shares per rand
Another advantage is being able to accumulate wealth even if
you can only afford to save a little each month - most of us are used to paying
for monthly expenses from our income, and it is a great idea to get into the
habit of monthly investing.
You also do not need to worry about trying to time the
market - the sooner you start the better. And once you start investing
regularly and continue investing during market highs and lows, you will greatly
reduce the market risk associated with equity investing.