FANews
FANews
RELATED CATEGORIES
Category Retirement
SUB CATEGORIES Annuties |  General |  Savings & Investments | 

Retirees cheer Tito Mboweni’s rates increase – BJM PCS

03 June 2008 Barnard Jacobs Mellet Group

Reserve Bank governor Tito Mboweni may be unpopular with stretched consumers following his recent rate rise but is being applauded by one group of often hard-pressed South Africans – retirees.

“Over-65s on a fixed income are cheering Mr Mboweni, especially if they can maximise recent improvements in the tax treatment of interest income,” notes Alan Botha, head of wealth, Gauteng, at Barnard Jacobs Mellet Private Client Services (BJM PCS), a leading adviser to high net worth individuals with a well-resourced retirement planning service.

“With inflation threatening to reach 9.5% and big rises in transport and food costs, rate increases are good news for those on a fixed income,” says Botha. “From a retiree’s perspective, this is much better than the alternative scenario of high inflation and low rates in pursuit of growth as the over-65s are usually risk averse and may be exposed when chasing problematic equity gains.

“With nominal money market rates above 10.5%, they can achieve solid returns without holding thumbs that equities bounce back.

“Mr Mboweni’s single-minded inflation-fighting may upset some commentators and add to the woes of consumers who have been living on credit, but pensioners with low or no debt are pleased that the policy environment is working in their favour for once.”

Smart retirees are maximising the opportunity by making the most of recent changes in the tax treatment of retirement products and tax exemptions on interest earnings.

Botha sketched out a typical one-two approach:

  1. The discretionary component of an over-65s’ portfolio ... In the last Budget, tax-free income on interest earnings was pushed up for over-65s from R26 000 a year to R27 500. As nominal money market rates are at approximately 10,6%, a retired person and spouse can together commit R500 000 into the money market and receive R55 000 a year free of tax.
  1. The non-discretionary element of a living annuity … Investment build-up on assets within an annuity structure is now tax-free. Tax is only paid on sums withdrawn from the structure (between 2.5% and 17.5% a year). So, house as many high yielding taxable assets as possible in the structure, make maximum use of tax exemptions on the discretionary element and maintain a disciplined approach to drawings to ensure that investments achieve optimum growth.

Alan Botha adds: “Needs vary and tax issues normally require individual treatment for greatest efficiency, but in many instances prudent retirees who have provided for the future are well placed to secure at least some advantage from the current interest rate climate.

“Numerous factors work against the over-65s, including spiralling medical inflation. It makes a nice change being able to advise them that they can derive some benefit from recent developments.”

Quick Polls

QUESTION

The Magnificent Seven technology shares are reshaping global equity markets, and making for some tough adviser-client discussions. How are you managing your clients’ return expectations during this tech age?

ANSWER

Diversifying beyond tech giants
Focus on long-term value investing
Increasing tech exposure in portfolios
Reinforcing realistic expectations
fanews magazine
FAnews November 2024 Get the latest issue of FAnews

This month's headlines

Understanding treaty reinsurance – and the factors that influence it
Insurance brokers: the PI scapegoat
Medical Schemes' average increases for 2025
AI is revolutionising insurance claims processing and fraud detection
Crypto arbitrage: exploring the opportunities and risks
Subscribe now