A tax-free savings account (TFSA) and a retirement annuity (RA) are excellent investments as they offer returns which are not taxed. This vastly improves the performance of the investment over time. Understanding the differences between the two will help to make a more appropriate investment choice. It boils down to different strokes for different folks.

The common ground
Both vehicles enjoy tax-free status on their investment returns. Capital gains tax, withholding tax on dividends and income tax on interest and rental income are all free. So they both offer the same tax advantage on returns.

The limits
The TFSA has a limit of R33 000 a year to a maximum of R500 000, whereas, there is no limit to the RA. However, the tax efficiency of the RA is more beneficial at a higher tax rate. The deduction is limited to 27,5% of taxable earnings.

The advantages
Liquidity is the main advantage of TFSA. You can access the funds at any time.
RA is inalienable – meaning that creditors cannot touch your investment. This may prove to be useful for business owners.

The conclusion
So TFSA is for the lower taxpayer who needs access to investment in the short and medium term.
RA suites the higher taxpayer for the long term where access to cash along the way is not an issue.

There is a strong case for investing in both.

Mother’s Day is a very important day for most. Mothers are undoubtedly the most important asset in the family. Mothers provide nurture and support with endless commitment giving their all even when they don’t have much left. How do you put a value on them when they are simply priceless? There are, however, some important financial aspects which should be in place which Moms should be aware of:

Get involved in the family’s financial plan

Understand the details of what provisions there are should a life-changing event occurs. Don’t leave it up to the spouse and find out the hard way if something happens. You will want to be assured that you know the financial implications and should adjust things whilst you can.

Is the family protected with sufficient life assurance?                                                

If Mom passed away leaving behind dependent children there could be serious financial ramifications for the family. Who will mind the children? If Mom contributed to the household income how will this be replaced? If Mom is dependent on Hubby and he passes on this could be financially disastrous. The amount of life assurance should cover all outstanding debts and leave behind enough to get through the months to maintain your monthly income needs until the children are off your hands.

Have you provided enough for education?
Provisions for education should be in line with your affordability. However, many families sacrifice a lot financially to put their kids through school leaving them in more debt than they can handle. Ideally, you should have a nest egg to subsidise your education costs. There are many ways to do this. My preferred is to have excess cash in your access bond which is available for the school fees and other must-haves. The bond provides liquidity and whilst there is excess you are paying off the bond in a shorter time.

Ultimately, a family that is well provided for is a happy one. Happy, happy Mother’s Day.

Towards your retirement years, you may consider giving up your home and moving into a retirement village. it is a huge life-changing event and needs careful consideration.

Purchase options
A life rights scheme allows you full use of a property in a village development as if you had bought it through freehold or sectional title.
The life right extends to the lives of both spouses and at the end, the value is adjusted based on the price paid in the beginning. The less you pay for the property the less you receive at the end.

There are practical reasons to consider before moving into a retirement village.

Location
It is very important to choose your location wisely. If you uproot and move far away (the coast) you give up your social circles and family ties. In your twilight years, this is extremely relevant and cannot be underestimated.

Maintenance
The huge advantage of life rights is that the developer remains the owner leaving him with the responsibility of the management, maintenance, and upkeep of the property and the village.

Health care
The village should have close access to health care. If you or your spouse fall ill you will need to be treated close to your home and loved ones.

Levies
The running costs of the village are shared by the residents in the form of levies. These can increase faster than you plan, eating into your retirement income. Life rights offer a more certain option and special levies are avoided.

Timing
If you decide to move into a retirement village it will be better to do so sooner than later. Moving in and settling down with your spouse will be easier and less stressful than waiting until you are older or only when your spouse passes on and you have to do it on your own.

Do your homework and involve your family as this important decision is life-changing and should ultimately result in peace of mind for you and your loved one.

The debate around active and passive performance still rages on with equity fund managers aiming to outperform the indices of certain markets and very few consistently achieving this over time.

Active fund managers charge a higher fee aiming to beat an index which is typically the average of a basket of shares in various offerings. For example, SATRIX 40 which is a fund of the top 40 shares on the JSE based on the size of the companies (market capitalisation). Fund managers such as Allan Gray, Investec and Coronation have Equity Funds which invest purely in the stock market. You pay a higher fee for these funds         (around 1,5% plus performance fees) expecting a better performance than the average returns of the top 40 companies (fee around 0,5%). 

3-Year Returns 

Measuring performance from December 2015 to December 2018, the average return of 130 General Equity unit trust managers was 2,04%. For the same period, the All Share Index delivered 4,33%. Only 28 of the 130 fund managers were able to beat the index over this period. The picture is even bleaker when the fund managers take their fees which are typically much higher than the index funds. 

5-Year Returns

The results over 5 years are very similar where the All Share index returned 5,77% with equity fund managers achieving only 3,90%. Only 14 out of 104 unit trust managers are able to outperform.

Source: Quarterly Collective Investment Schemes Performance Survey (ASISA/Profile Data (31/12/2018).

Consistent perfomance

This passive approach will never yield the highest returns in a period as you always participate in the average. However, it is clearly evident that the average over time is more reliable than sometimes getting a higher return and most times not! Investing successfully relies on consistent positive returns at the highest yield compounded over time. So, fund managers sometimes do better but over time they struggle. It becomes a tale of the tortoise and the hare. 

Simple choice

Passive investing is a much simpler choice over 130 various equity funds on offer in the unit trust space. 

An access point for passive investing is found in Exchange Traded Funds. A useful site is www.etfsa.co.za which offers a comprehensive range of funds – equities, property, bonds, offshore, resources etc…

You simply chose a fund on offer in a specific market or sector.

Lower fees

Passive returns are enhanced by the lower fees applied. In the current weak economy, it is evident that returns are hard to find. Fees reduce the yield which in turn affects the compounded growth over time. It stands to reason that the lower fees will improve growth over the same period.

It is difficult to find a compelling reason to invest with a particular equity fund manager or even a combination when the outcome weighs in favour of a weighted index over the same period of time.

In its 2019 Election Manifesto, the ANC says it will “Investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development and township and village economy) and job creation while considering the risk profiles of the affected entities”.

What currently is in place are conditions laid out by regulation 28 of the Pension Funds Act, which restricts exposure of retirement funds to no more than 75% in equities. This in itself is inhibiting. Whilst the intention is to add some stability to retirement savings have 25% forced into bonds and cash the upside presented by equities over the long term is restricted. If one could invest 100% in equities over the long term the returns would likely outperform by far. 

Forcing retirement fund managers to invest in prescribed assets poses a problem around expected returns and asset allocation in portfolios. Fund managers of various collective investments follow a particular mandate which aims to achieve returns through strategies which they identify and provide. Having to invest in prescribed assets takes away the ability to invest where opportunities present themselves. If, for example, a client wanted to take an aggressive approach to his retirement funding, future returns would be hampered significantly if the fund was compelled to invest in assets which did not provide the same returns found in aggressive assets such as equities. 

Let’s hope that this is just political noise building on the elections this year. The pension funds industry is around R4 trillion and should be left well alone to the investors to decide how their money should be allocated. Prescribed assets provide funding which props up underperformance

Yes, history is a perfect science. We now can clearly see where Bitcoin and other cryptocurrencies are and have been. The frenzy leading to the peak at the end of 2017 at $20 000 left many in a state of awesome wonder. Wondering whether they should buy, sell or hold. Social media drove the hype with all types of stories of how top investors were investing millions into the leading crypto’s creating huge momentum in pushing up the price.

The scheme exposed

Cryptocurrencies have all realised the inevitable. They have all fallen from the dizzy heights in which they were driven through falsehoods and exaggerated expectations. Leaving many speculators (not investors) bruised and disillusioned.

Lessons learned

From my Blog posted on 14 September 2017, I found 3 reasons for not being involved with Bitcoin. These are now lessons learned.

• If you don’t understand what Bitcoin is
• If you think Bitcoin will increase as it did in the past
• If you don’t have funds you can afford to lose

Where to from here?

Cryptocurrencies have paved the way for our financial future. Blockchain technology is an appealing way forward. So the offering is found in the transactional potential, not the wallet. Once regulated the crypto will settle. 

Be aware! Get-rich-quick schemes are full of vagaries.

It’s been a year of turmoil, to say the least. Locally and Globally. If you have your head above water at the turn of this year then congrats!!! You have been through one of the toughest years in our economic history.

There is some breathing space which we have managed to create as we end this year.

Averted a downgrade

Ratings Agency Moody’s has kept us alive by holding onto its rating on our Bond’s meaning that foreign investors can still deal with us. So important as it has created some time for us to avert “Junk Status”. 

Worked our way upwards from a technical recession in the 4th quarter

After a technical recession in quarters 2 and 3, we surprised the markets with a rebound in quarter 4 of 2,2% GDP. This takes us upwards and away from the gloomy expectation of negative growth and hopefully toward positive territory in 2019. 

Oil prices retreated at the end of the year

The great story for 2018 from a South African point of view is the oil price retreating from over $80 a barrel to the mid $ ’50s. There is every reason to expect a cheaper pump price for petrol and diesel and may we never get anywhere near the R17 per litre again.

So whilst their year was full of turbulence we do have some good news to take into the new year. 

Here’s to a happy and improved 2019.

Start with your net worth                                                                                          

Create a personal balance sheet totally your assets and liabilities The difference is your net worth. The idea is, if you were to sell everything you own and paid off everything you owe the amount left over is how much you are worth. This is an essential starting point for a sound financial plan as it establishes where you are financial. It also identifies opportunities how to improve your worth. You could target to pay off your liabilities sooner and/or invest in assets that grow better. 

Preserve your capital                                                                                                

2019 will start with markets trading at dizzy heights shrouded in a cloud of uncertainty. If you lose 50% of your capital you need a 100% return to get it back. Your investment should be positioned to preserve capital. 

Seek certainty                                                                                                                Of all the asset classes to invest in cash is king. Equities have underperformed in all sectors for the last few years. Property in all sectors to has underperformed. This isn’t surprising as our economy has weakened and interest rates have risen in the past few years. Certainty is found in the current interest rate cycle which has trended upwards over the past few years creating an opportunity to find returns of up to 8% in the money market.

Don’t ignore debt                                                                                                           As interest rates move upwards so does the cost of debt. It stands to reason that the sooner debt is paid off the more one saves. The direct return is the percentage of interest being charged. So, paying off a credit card at 22% saves you that amount immediately. This is much more certain than trying to find an investment that will guarantee you the same return.

Avoid risk                                                                                                                    2019 will be a tough year both locally and globally. Whilst it defies the conventional wisdom that ‘time in the market’ is the tried and tested strategy we should consider being less conventional and defend our investments in cash and debt until there is a compelling reason to diversify into the other asset classes. Your pension fund, and retirement annuity fund should be switched into the money market for the foreseeable future. Any lump sum amounts should be invested in a money market account. Debt offers the best return for the new year.

2018 has revealed how unconventional the world has become. In the conventional days, one would predict the future with some certainty as the past performance was a guide to the future. 

Economics 101 sets out a principle in economic cycles. In a free market, there should be as little intervention as possible. Since 2018 which was the worst crash since the great depression central banks have intervened like never before.

This has propped up a market which has run so far ahead of itself that it is now dizzy. Thursday this week signalled the toppling of the inevitable. For the past few years, assets have performed negatively except for cash in South Africa (7%). 

Conventional wisdom says it’s time in the market. This is probably more applicable if you are already invested as there is a cost to sell or switch. Unless, however, you are invested in a tax-free wrapper or a retirement fund which has no effect on the subsequent capital gains tax. 

As unconventional as if seems, an option to consider is switching for the short term, your retirement funds to a money market fund. Immediately, you will lock in your capital with very little risk of losing it and enjoy positive returns off the back of our rising interest rates. Retirement funds and tax-free savings accounts escape the capital gains tax implications so you protect value as opposed to unit trust and endowment investments.

For the risk-averse, this strategy will not harm you in the least. You will be investing in certainty for the foreseeable future positioning you to switch back when certainty is restored. 

It must be emphasised that this is a short-term strategy and should be reviewed alongside your investment goals over time. If in doubt, talk to your financial advisor.

This week was pretty hectic, to say the least with the Reserve Bank sneaking in a,25% interest rate increase whilst inflation is still within the range of 3 to 6%.

The timing was pretty harsh just before Black Friday and then only a few weeks before the festive season.

The average household is using up to 75% of monthly income to service debt. So,25% might not seem a lot but when you add it to the net increase of 1,5% we have experienced since 2014 this leaves us with a 1,75% higher cost of debt. this is applied to your bond, your credit card, your overdraft your car.

Essentially, every R100 000 of debt costs R1 750 more since 2014. An R500 000 bond costs R729 more per month.

There is a silver lining which is starting to peek from the dark cloud. It is found in the recent drop in oil prices at the same time that the Rand has strengthened. This should provide the authorities with ample reason to cut the current petrol prices which have been punishing us. Oil has fallen sharply by 20% to below $60 and the rand dipped below R14 to the $ this week.

We need this trend to hold for a while which will provide some respite and compensation for the interest rate hike.

Some much-needed relief is on the horison just before the end of the year.