Where to Invest

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In our view investing is different from saving. Saving is the accumulation of money, typically to invest. Investing on the other hand allows you to grow your money.

Wondering how and where to invest money?

Deciding on where to invest your money takes expertise to ensure you gain the best returns on your investment. Let us show you how to make your money grow.
Seeking financial advice can be an overwhelming task for a lot of people. When it comes to investing your hard-earned money, there are many options. Choose the right investment option to ensure that you don’t sink but swim involves not only choosing an investment provider but also an investment type and management style.

Why should you invest?

In our view investing is different from saving. Saving is the accumulation of money, typically to invest. Investing on the other hand allows you to grow your money.
Growing your money is not as simple as making sure you have more this year than last year but REAL Growth which refers to an increase in your purchasing power of your accumulated funds.
In short, a true investment will give you a return that is greater than the rate of inflation.
One of the easiest ways to achieve above inflation growth is to avoid unnecessary taxes on your money by making use of Tax free savings which lets you keep more of your hard-earned money. After all the greatest expense we all have is tax.
The vision of not working your entire life makes a compelling case for smart efficient investing.
Regardless of your goals, investing is the way to get you there. Here are the 4 types of investments categories to help you reach your goals:

  1. Discretionary investments
  2. Endowments
  3. Retirement Annuities
  4. Tax free savings accounts

Learning how to invest your money is crucial. When wondering where to invest money, you need to understand each investment option and how best to use it in your specific circumstances.
The type of investment used to achieve the same goal for 2 people with different personal circumstances will not necessarily be the same. Knowing what works best, for who and when is important.
Let’s review the 4 main types of investments you can use to grow your wealth with the main features for each option:

Discretionary Investments

This is any investment that does not have its own special set of tax rules. All income, Capital Gains and other taxes are applied to you directly. Examples are share portfolios, money market accounts, unit trusts and property investments owned directly by you. Important to note is;

  1. These are investments in your own name.
  2. You will pay all the tax in your own name.
  3. They do not have their own internal tax treatment.

These investments do not usually have any fixed terms and can be accessed (Sold / Withdrawn from) at any time.
When to use

  • Individuals with low personal Income tax
  • Individuals that DO NOT have large estate duty (death tax) problems
  • Individuals that want full access at any time to their investment
  • Individuals with investment terms shorter than 5 years

Endowments

In our opinion these are probably the most miss sold investments, they are used far too widely and the reason for this is the commissions on these products – another reason why fee-based advice is always the right choice.
Now that Tax Free Savings Investments / Accounts are available to South Africans the endowment has an even narrower role to play in financial planning.
Important to note is;

  1. They are better suited to high-income tax payers.
  2. They are investments for a five-year period or longer.
  3. They pay out tax-free but have their own internal tax rates for Income and Capital Gains.

When to use

  • Most beneficial for Trusts since the Income and Capital Gains Tax rates are significantly lower than that of the trust itself.
  • Individuals who have an AVERAGE (Not marginal) Tax rate above 30%
  • Individuals who struggle with self-discipline and want protection from themselves by not having access to the funds without paying an early withdrawal penalty.
  • Individuals with a minimum investment term of 5 years or more.

Should you be in a lower income tax bracket then this may not be the best option for you. It is always best to chat with your independent financial planner to make sure you grow your investments and wealth as efficiently as possible.

Retirement Annuities

This is one of our favourite tax planning tools and can achieve many of the goals clients previously used Trusts for. Considering the changing landscape and complexity surrounding trusts it is a good time to turn back to the trusty Retirement Annuity.
Essentially a RA is a personal pension fund that you establish in your own name instead of your employer doing it for you.
Receiving a tax deduction when you contribute to a retirement annuity is a big draw card of this option, since every cent of tax you don’t pay is a cent that stays in your pocket. Remember money saved is as good as money made.
Excess contributions, over and above your limit, can be deducted from your future taxable income. They are a great investment because:

  1. You get a tax deduction now that you can also save thereby increasing your retirement saving further
  2. The internal tax rate is 0% on both income, capital gains and dividends tax. This means that if you start a RA and an Endowment at the same time invested in the same fund, the RA will end up with a much higher fund value over time due to the compounding of Tax free growth upon Tax free growth
  3. Protection from Creditors. That’s right if you go bankrupt they will take your house, your car and your TV but NOT your RA or Pension Fund
  4. No Estate Duty (Death Tax) The value of your RA is not part of your estate when you pass away therefor you save the 20% tax the government charges you for the pleasure of dying. Your Discretionary Investments and Endowments will however be taxed.
  5. Access only after age 55 this is pension money, so you can only gain access after age 55, it is also a great way to protect your older self from your young and reckless younger self.
  6. You are forced to take a minimum of 2/3rds as an income (on which you pay normal PAYE like a salary) with a maximum of 1/3rd as a lumpsum (which is partially tax free). So I can already hear you complaining “who are they to tell me how to use my money?” well as it turns out they are rather smart and generous authorities who know that the large majority of the population only gets financial advice once they are financially in trouble and no-one can help them because regardless of the belief that your retirement dream of starting a “Fish & Chips take-away” that you are convinced will be the next great franchise, the reality is that most retirees make very poor investment decisions with their lumpsums and the majority of businesses (about 95%) will fail in the first 5 years. Isn’t it good to know you have an income every month regardless of the success or failure of your other ventures? It also means that after all the generous tax deductions the government gave you, you won’t have to go stand in the SASSA que to get a pensioner’s grant.

When to use

  • Well in case you skipped everything above – When saving for retirement
  • When you want to reduce the amount of income tax you pay.
  • When you want to grow assets without growing your estate at death.
  • You want protection from Yourself & Creditors with access to only 1/3rd as a lump sum after age 55.

Of the 2 investments I believe everyone should have, a Retirement Annuity is the first.

Tax free savings accounts

This investment type is a fairly new kid on the block and has only been introduced fairly recently to South Africa, but similar investments have been available internationally for years. The purpose of this investment type is to encourage South Africans to save more, especially since we are very far behind by global standards.
TFSA’s combine some of the best benefits of the RA with that of the Endowment.

  1. They have 0% internal Tax rates just like a RA
  2. They pay out free of tax with no restrictions on age or how you take your money like an Endowment

3.Sounds too good to be true? While the government is generous they still want people to pay some tax, for this reason you are limited on how much you can invest into these products annually (Currently R 33 000 pa & a lifetime limit of R 500 000). If your investment more then you pay 40% tax on the over contributions, so don’t, and yes, it is not per TFSA it is across all accounts with all providers so opening different ones will not allow you to invest more. This is why it is important to choose a provider who offers the facility to redirect any over contributions to a separate discretionary investment, not all providers offer this so make sure.
When to use

  • The first investment type you should start as soon as possible since the sooner you start the longer you have to gain the benefits of compounding Tax Free Growth on Tax Free Growth, although you are limited as to how much you can contribute annually and in your lifetime (it will take 15 years to reach R 500 000 at maximum contributions of R 33 000 pa) there is no limit on how large your investment can grow so start now.
  • Saving for a goal longer than 5 years but less than age 55. Typically Study Fund for your children. Do not use the study policies structured as Endowments it is an inefficient way to save for most people.
  • Together with your Retirement Annuity – Save your tax deduction in your TFSA and when you retire the value of these investments together will be the benefit your RA contributions generated.
  • You want access to your funds. I caution against this though since the greatest benefit of a TFSA is the tax-free compounding and this effect becomes greater the longer you keep the investment. My own rule of thumb is that if the funds will be needed within 5 years rather save in a discretionary product.

This is the 2nd type of investment that every person should have and is the perfect investment to use to reinvest your tax saving gained from your RA contributions.
For more information regarding tax free savings accounts we highly recommend speaking with your Certified Financial Planner. Now that you have your ducks in a row, with regards to where to invest your money.
The next step is to tackle the issue of how to invest your money. Learning this is a crucial component in growing your wealth.

Imperative steps when investing

Investing is identifying where you are now and where you would like to be. As well as what you would like to invest in, these 5 steps are critical to getting the best returns:

  1. Assess and make a list of your long-term goals i.e. what do you want to achieve and by when.
  2. Get your finances in order
  3. Decide who is going to do the work
  4. Choose the correct account / investment type
  5. Diversify

It’s important to remember that the minimum amount to save, suggested by the SA. Government is 15% of your salary. Ensure that you prioritise clearing all your debts before investing.
If not done correctly you could land up with more debt than savings. We highlight each critical step to make sure you don’t end up in hot water; here’s how to invest;
Step 1: Assess and make a list of your long-term goals
Setting your investment goals is a priority that only you can do and will differ from person to person. When setting you goals ask yourself, what is best for you in terms of;

  • Your current position in life. Consider affordability, current debt, future purchases (Car, Home), expected future expenses (having children) etc.
  • Your time frame to reach the goal. This is vital since it will determine either how much you have to invest or how much risk you need to take with what you have available to invest. Your financial planner will be able to advise on this.

Step 2: Get your finances in order
Don’t just jump into investing without inspecting your current finances. A budget is the starting point of any financial plan. Take a look and review your spending patterns to make sure you can save on a regular basis. By partnering with a Certified Financial Planner (CFP®) you will be able to identify how to save more and stay committed to your savings and investment plan by having regular reviews.
We always start by telling our clients that investing in your debt is one of the best returns you can get plus it’s tax free. Remember money saved is as good as money made, whether you pay less interest by reducing debt or earn interest by investing, the effect is the same, except that the rate of interest you pay is likely to be higher than the one you earn, and you could potentially be taxed on the interest you earn.
There is good and there is bad debt, how you make debt can also make or cost you money. This is a vital conversation to have with your CFP® so that you know where best to focus your debt reduction strategy.
Step 3: Decide who is going to do the work
Making the right investment choice is crucial to attaining your goals. Managing your own investments take time. Ask if you can afford to dedicate the time you need to learn how to be a successful investor.
If you do not have the knowledge or time we suggest using a professional FAIS compliant Independent Financial Planner. You can opt for them to do your investment structuring and develop a holistic Financial Plan. Using an Independent planner makes sure that they work for you the client and not a product provider.
Working with a fee based Financial Planner ensures that your goals are aligned and not driven by a commission incentive. We strongly believe that fee based advice results in good quality advice, the same way you pay your lawyer or accountant.
If you only want to buy a product, then there is nothing wrong with the provider of the product paying a commission but then expect a transaction relationship and not an advisory relationship.
The reality is that not every financial problem has a product as a solution, sometimes all you need is a partner to help you budget, manage your debt or keep you committed to a plan.
Step 4: Choosing the correct investment type
Your investment style will influence and determine what your portfolio consists of. Always weigh up the pros and cons of the different investment types as well as features of the provider of the investment. You can also contact us to help you make an informed decision.
Step 5: Diversify
Ever heard the saying: “don’t put all your eggs in one basket”? Well, in a nutshell, that is diversification.
Why diversify? To increase your returns relative to your overall risk.
Due to the simple notion that there will be times where one asset class (Cash, Bonds, Equity & Property) will do badly and others will be doing well and the fact that geographically certain economies perform better than others at different times, diversification is essential especially for a small economy like South Africa that only represents 0.5% of global GDP and has a concentrated local market, you need to consider;

  • Diversifying your investment across multiple asset classes
  • Investing across providers
  • Investing across different Strategies such as Active and Passive investing
  • Investing across different Styles such as Value vs Momentum investing etc.
  • And most importantly in our opinion Diversify from a Geopolitical point of view get offshore exposure in your portfolio, either directly or indirectly.

Speak to our experts and let us show you how and where to invest money. That way we can do all the hard work for you and you can reap the rewards.

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