Investment options

2012-04-11 07:30

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, responds:

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, responds:

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 invested.

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.

 - Fin24 

  • lee.vanrensburg.9 - 2012-08-03 13:39

    What ever you do, dont get fooled into an endowment!! Look at your rate of tax first, CGT, and tax in the endowment - Most of the time it doesn't make sense

  • jeni.abdul.7 - 2012-12-04 23:57

    As tax seems to be a big concern for investments, does anyone know how do online trading profits get taxed? Since most online trading (even with local brokers) requires funding your trading account through sending money in an off-shore account, how does it work? With all the top brokers coming to the South Africa Forex Expo in Cape Town this weekend and possibly attracting thousands of new local investors, it is an important facet of investing to understand....

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