Where to save your savings – A practical look at the products available

Francis Marais, Product Director at Morningstar Investment Management SA

South Africans are lucky to have a wide variety of savings and investment options available to achieve their diverse financial goals. This may be for long-term wealth creation, medium-term goals (like saving for a deposit on a house) or short-term emergency funds that need to be available immediately.

Before we take a practical look at the various choices or products available through which to save and grow wealth, it’s important to take note of some initial considerations:

• Consideration 1: Your time horizon

The first consideration is the time horizon of your goal and ensuring it matches the product you ultimately choose. Just as it makes no sense to have your short-term emergency funds stuck in your retirement annuity (RA) it similarly doesn’t make sense to have your long-term savings sitting in cash in your bank’s saving account. As things currently stand, South Africans are also mostly encouraged to save for the long term via different tax incentives.

• Consideration 2: Tax benefits and trade-offs

This brings us to our second consideration which is the different tax benefits available via the different products on offer. It is important to be aware of the unique benefits and trade-offs each product offers. The rule of thumb is generally to maximise risk-adjusted returns net of fees, and after-tax (within your unique preferences and requirements). Actively engaging with one’s financial adviser is, therefore, not only needed but vitally important.

With these basic considerations established, let’s delve a bit deeper into some of popular product options South African investors have access to.

Pre-retirement savings via a Retirement Annuity (RA) or an Employer’s Provident and Pension Funds.

For most South Africans, saving towards retirement is still by far the most popular way to build long-term wealth.

The benefits of saving via these products, include:
• Immediate tax benefits as the amount saved gets deducted from your annual taxable income (thereby reducing your taxable income).
• From a longer-term perspective all income and capital gains generated are tax free, so your net investment returns can compound far quicker.
• In addition, these pre-retirement products also offer various estate planning benefits which your financial adviser will be able to elaborate more on.

At retirement, the majority of your wealth accumulated in your RA or Pension fund must be used to buy an annuity (adhering to the two-thirds rule1). Post-retirement income withdrawn is, however, subject to income tax. In addition, these RA’s and pension funds need to be Regulation 28 compliant, which limits the exposure to asset classes such as equities, property and total offshore investments.

Recent changes to Regulation 28, including the ability to invest far larger portions offshore (45%) and the inclusion of alternative investments (such as hedge funds, infrastructure, unlisted debt and private equity) have largely addressed previous concerns such as limiting the amount of risk and diversification and therefore the potential return opportunities available.

Click here to read more...