Dear reader,
Thank you for your question.
Based on your age and your frugal lifestyle (mentioned above), this suggests that you are more conservative with your investments, and as a result, we believe that the risk exposure in your investment should be between 40% and 50%. This suggested risk profile will allow the investment to grow, and the balance should be invested in conservative funds where you can draw a monthly income. Depending on the underlying funds invested and market sentiment, this balanced approach could give you a return averaging between 7% and 12% per year.
Interest rates are very attractive right now due to the recent hikes the South African Reserve Bank has been implementing strategically to control inflation.
It may however not be a good idea to invest all your funds in a bank account or government bonds since this is a passing economic event.
When inflation is low, the South African Reserve Bank will be forced to reduce the interest rates to an equilibrium point, thereby affecting your funds in the bank.
From a taxation perspective, the interest you earn from a bank account is usually considered taxable income, which means you will need to pay tax on the interest you have earned. The rate of tax you pay on this interest is based on your marginal tax rate. An exemption of R23 800 (for persons under 65 years of age) or R34 500 (for those 65 and older) will be applied during the year of assessment.
However, with this probable conservative risk profile, you may also consider investing in the following options to increase your capital:
- Invest the R400 000 from your matured fixed deposit and the gift in your current account in a linked investment (also known as a unit trust).
- When your 24-month fixed deposit matures in February, divide the R500 000 into your existing linked investment and an offshore unit trust for diversification purposes.
Let us explain to you what a unit trust (local and offshore) is and why it is beneficial to invest in one.
A unit trust is an investment vehicle for individuals who want to pool their money with other funds to invest in a diversified portfolio of equities, properties, bonds, cash, and other assets. Unit trusts are managed by professional fund managers who use their expertise to select investments and manage the portfolio to generate returns for investors.
Offshore investing is a good way to boost your capital, as it allows you to spread your risk across different economies and geographic regions.
Given the volatility of the rand, offshore investing is a good way to gain exposure to better or more developed markets.
When investing directly offshore, it is important to understand that you can invest up to R1 million without applying for a tax certificate; any amount above R1 million will require Sars tax clearance. The maximum you can invest offshore per year is R11 million.
There are several benefits to investing in a unit trust:
- Diversification: Investing in a unit trust allows you to diversify your investment across a range of assets, such as equities, bonds, properties, cash, and other asset classes. This can help reduce the risk in your portfolio since the value of different assets tends to move independently.
- Accessibility: Unit trusts are easily accessible to investors, with relatively low minimum investment requirements. This means you don’t need a large amount of capital to start investing.
- Liquidity: Unit trusts are typically easy to buy and sell, providing investors with liquidity. This means you can quickly convert your investment into cash if you need to.
- Potential for returns: Investing in a unit trust gives you the potential to earn returns that may be higher than those available through savings accounts or other low-risk investments.
However, there are some risks associated with unit trusts. As with any investment, there is a risk of capital loss, and the value of units can fluctuate depending on the fund’s performance. Unit trust fees and expenses, which can reduce returns, should also be considered by investors.
Before investing in a unit trust, it is essential to read the prospectus and understand the fees, expenses, and risks.
When you sell units (withdrawing or switching) in your investment for a profit, the difference between the purchase price and selling price is known as a capital gain.
Normally, capital gains are subject to capital gains tax, which means that you will need to pay tax on the profit you have earned. The maximum rate of tax you pay on this gain is 18% (the inclusion rate of 40% multiplied by your marginal tax rate). During the assessment year, an annual exemption of R40 000 will be applied.
Regarding your classic investment plan, you must consider the tax implications, as withdrawing the amount will result in capital gains tax.
If the capital gains tax is low, we suggest that you invest the funds in an offshore investment or even buy a whisky cask. During these volatile markets, whisky casks are a popular offshore investment as the return is between 10% and 15% per annum, and you can enjoy it after it matures. If the capital gains tax is high, consider switching to underlying funds that do not have a high capital gains tax. Your financial advisor should be able to assist you in this matter.
We do hope that the above has given you some sort of guidance, but you are more than welcome to contact us for more financial advice. Happy investing.
