Cape Town – For a number of years, South Africans’ poor savings habits have been disguised by sterling investment returns on the equities market. But those days have been replaced by much lower yields and when returns are lower, people need to beef up their savings.
“This is not the time to go out and buy that Golf GTI, a coveted new perfume or luxury watch, but rather to make sure you have a proper savings plan in place,” say Francis Marais and Jan Vlok, investment analysts at Glacier by Sanlam, “so that you can be financially independent whether you’re young, close to or near retirement.”
Tax-free savings account
Marais and Vlok suggest that young workers consider putting money away in a tax-free savings account – a savings vehicle introduced in March 2015 – whose proceeds are totally tax-free.
The tax-free savings account allows you to invest a maximum of R2 750 per month, or R33 000 per year, or R500 000 in a lifetime.
The quickest you will reach the lifetime maximum of R500 000 if you save the maximum amount monthly would be in 15 years.
Young workers with a lower marginal tax rate would do well to save monthly in the tax-free savings account and the sooner the better, so that they can get the benefit of compound interest.
If you save R100 per month for 40 years and you earn a 10% return on the investment per year, you’ll have R650 000 at the end of the savings period.
But if your investment horizon is 20 years, you’ll have to save R850 per month to reach the same R650 000. In other words, your monthly saving has to be 8.5% more for the same amount.
“This is the power of compound interest,” say Vlok and Marais.
As people get older and their marginal tax rate increases, an endowment policy is a good savings alternative.
“If you’re for example close to your 50s and you’ve reached your lifetime maximum in your tax-free savings account and you’ve already contributed the maximum of R350 000 per year in your retirement annuity, consider an endowment policy,” say Marais and Vlok.
The investment period for an endowment policy is five years and the tax on income is levied at a flat rate of 30% within the endowment. This is attractive, especially when compared to the 45% tax rate for earners in the highest tax bracket.
Another plus of endowment policies is that capital gains tax is levied at 12%, compared to 18% for other discretionary savings vehicles.
The benefit of saving through unit trusts is that you get exposure to companies’ stocks without having to buy the shares which can be very expensive, as is the case with blue-chip companies.
Another advantage, Marais and Vlok say, is that you don’t pay capital gains tax when the fund manager moves shares in an investment portfolio. “You only pay capital gains tax when you sell units, but as long as you stay invested you’re exempted from it.”
Set something aside for emergencies
Vlok and Marais suggest that young workers ensure they have sufficient liquidity for emergencies. “Don’t put all your savings in a retirement fund, but put some money aside in a reserve fund – three to six months’ salary.”
Enhanced yield and flexible income funds are good investment vehicles for emergencies, as the yields are higher than in money market funds and the draw down is lower.
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