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Question: My husband and I have finally reached the stage in life where we have some money left over at the end of each month. I would like to invest this wisely and need some guidance. We are both in our mid-forties and earn decent salaries.
Answer: I would strongly recommend that you speak to a financial adviser who can do a full audit of your finances and help you clarify your short-, medium- and long-term goals. You can then construct an investment strategy to meet these goals.
I will, however, run through a few of the factors you should consider when you have this discussion.
Debt
Before setting up an investment strategy, you need to get rid of short-term debt. If you have any car loans or overdrafts, I would strongly urge you to clear them. There are very few investments that provide an after-tax return that is better than what you are paying on short-term debt.
Tax
You mentioned that you and your husband are earning good salaries. It is, therefore, important that you take tax into account when you structure any investments. By using the correct structures, you can make a significant increase to the value of your investments through the tax savings.
Here are some of the structures that you can consider when making an investment with a term of more than five years:
Retirement annuity
You are allowed to invest 27.5% of your taxable income into retirement savings and have that amount come off your taxable income. This will give you an immediate tax break on your contributions.
For example, if you are paying tax at a rate of 40% and you invest R1,000, you’ll get R400 back from the South African Revenue Service when your tax is assessed. In the meantime, the full R1,000 would be growing in a tax-free environment in the retirement annuity.
Tax-free investment
You are allowed to invest R36,000 a year in a tax-free investment and there will be no capital gains tax (CGT) on any growth.
Be careful about using this for short-term or medium-term savings, as you are only allowed to invest a maximum of R500,000 in your lifetime.
Endowments/sinking funds
If your tax rate is above 30% or is likely to be above 30% when you want to access the investment, I would recommend that you consider investing through a structure such as a sinking fund or endowment.
These are wrappers for housing your unit trusts or share investments, and the advantage is that you will only pay tax at a rate of 30%. This means the CGT you pay on any growth is 12% instead of a potential 18%.
In addition to the potential savings in CGT, by housing your investments in a structure like this you can bequeath them to a beneficiary and save a further 4.025% in executor fees when you pass away. The transfer of this investment to your beneficiary will also not be subject to the delays that would happen if it went through the master’s office.
Offshore investments
Most of us who are members of retirement funds or own property have the bulk of our wealth concentrated in South Africa. It is never a good idea to have all your wealth concentrated in one country, so you should consider moving some investments offshore.
Most of the retired people I consult with have children living overseas. They typically visit them for an extended period every couple of years. By having an offshore investment they can access when they visit, they will not be as badly affected by any short-term volatility of the rand.
It is a very easy process for each of you to invest R1-million a year offshore. Remember to use a structure such as a sinking fund or endowment. Not only will this save you on CGT and make the inheritance easier, you’ll also be protecting yourself against being charged any potential inheritance taxes that may be levied offshore. DM
Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpadvice.co.za
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.
