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Feathering your Retirement Nest

By Brendan Dale

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There are many ways to invest for your retirement years and, even though you may contribute to a compulsory company pension or provident fund, you should most definitely not be content with just that. A terrible reality is that only around 6% to 10% of South Africans are on track to retire comfortably (different surveys give varying results), and the mainstream idea of contributing to a single fund needs to be reconsidered.

It’s a jungle out there, and making financial decisions is difficult, even if you are not about to retire. As Fedgroup’s Dimeon van Rooyen says:

Each person should adopt an investment strategy that is tailored to their personal needs, goals and personality. Good, professional financial advice is therefore essential. That said, the stock market in the country has delivered poor returns over the medium term, so investors might well want to consider other opportunities that provide good, predictable returns, without compromising on capital security. For example, our Secured Investment has proven very popular with retirees, many of whom choose the income option, so they get a fixed monthly income while their capital portion remains secure.

Tax-free savings account

If you’re aged 40 or younger, and are able to contribute the maximum annual amount of R33,000 to a tax-free savings account (TFSA) each year, then this could be a great way to supplement your retirement fund. The lifetime contribution limit of R500,000 will be reached in the 16th year of investing, and the tax benefit will already become evident in around the sixth or seventh year, depending on the growth and other investments you may have. Considering that the first R23,800 of your overall interest earned in a year is tax-free, any interest above that is taxed at your current tax rate. This implies a huge saving in a TFSA, especially if you leave your money untouched for 20 years or more as the compounding growth remains tax-free. If you’re in one of the higher tax brackets, this will make a noticeable difference. Another great advantage is that dividends earned in a TFSA are also exempt from the normal tax of 20%, so the growth is truly tax-free.

Retirement annuity

Another investment option to consider is a retirement annuity (RA). Contributing to an RA will reduce your taxable income (meaning you pay less tax) but only up to the limit of 27.5% of either your taxable income or remuneration (whichever is higher), capped at R350,000 per tax year. You could calculate the tax you save, and then invest that too; it’s essentially ‘free money’.

Other good reasons to look at RAs are that the growth on your investment is tax-free, and the lump-sum benefit at retirement is also exempt from tax. You will pay tax on withdrawals during your retirement, but as the tax rebates, rates and allowable deductions are favourably adjusted for people aged 65–75, you will
ultimately pay less tax.

Property

Investing in property in order to create an income stream is a great idea but you should make sure that you understand the tax implications. Owning property in your personal capacity, a trust or in a business all have their different tax advantages, so you should consult a tax expert to find the best solution based on your circumstances. If you already own property, and have not consulted with a tax practitioner in the past few years, then you should consider doing so to make sure that you are running things as efficiently as possible.

Offshore investment

The future is uncertain, so it’s a good idea to put some of your investment eggs into a basket that is geographically and administratively distant. Ben Mitchell, senior consultant at IP Global, gives some guidelines for selecting the best partners and products for starting an offshore portfolio. It’s all down to good research, and due diligence. As you may know, IP Global have a dedicated investment and research team, based in Hong Kong. They’re the ones who will identify markets that meet our investment criteria, which is focused primarily on:

• transparent legal and tax frameworks
• political and economic stability
• low entry and exit costs
• ease of access to finance for foreign investors.

From there they will identify pockets of value within those markets, looking for:

• fundamental supply and demand imbalance
• historical and forecast sales and rental data
• new regeneration projects that will drive the local economy, and increase future house price growth and rental yields
• infrastructure projects that will enhance property values by reducing or improving commuting times to key employment nodes.

Once we have identified the market and the pocket of value, we would approach property developers. We work only with reputable property developers who we know, and who have demonstrably strong track records of delivering developments on time, on budget and in line with what they set out to deliver. With regard to the specific projects, these will ultimately be selected based on all of the above, plus their individual fundamentals, such as purchase price, average price per square metre, and projected rental yields. Obviously, we also take into account the general look and feel of the development.

Gold and other precious metals

A less talked about investment option is gold and other precious metals such as silver and platinum. You can purchase shares in funds that track these indexes, or even buy Kruger Rands that are kept for you by the investment company you use. You can, of course, buy actual tangible Kruger Rands, other coins, or metal bullion bars from dealers such as Metcon. Seeing a physical investment and knowing that it is easily traded, and can literally be carried around, can add to your peace of mind.

Some things to consider are that bullion bars attract VAT whereas Kruger Rands do not. Also, bullion dealers need to make a living, so generally you would buy at around 10% higher than the daily listed price and sell at around 10% lower. What this means is that you should hold on to your investments for a few years to make up for the initial ‘loss’.

Bottom line

Investing for your retirement isn’t simply a case of contributing a small percentage of your salary to a fund each month. Rather overcompensate, and diversify your investments with a combination of tax-efficient investments to ensure that you’re not one of the poor statistics in South Africa. It’s never too late to start focusing on funding your retirement, and assessing your finances holistically to better understand your current position.

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