A linked investment service provider (LISP) is probably one of the lessor-understood investment vehicles. Most investment houses have them and have been around for a while.

What are they?
They are investment platforms which offer access to a universe of investment options from shares to ETFs and Unit Trusts. They provide all the investment policies such as endowments, retirement annuities and preservation funds. So you can invest in, say, an endowment with a LISP provided by Momentum and choose from a variety of funds from Old Mutual, Sanlam and Liberty Life.

The advantages of a LISP

One administration
You have one application and one statement for a variety of investments providing a ‘one-stop shop’ without placing all your eggs in one basket.

Switching funds
You can easily change your funds without having to change your policy. Policies have terms and conditions in their contract which affect the payment. If you change your policy prematurely then you could lose benefits. You can keep the policy at the LISP and simply change to funds with another company maintaining the benefits.

Fees
Most LISPs offer a discounted fee structure based on the value of your investments on their platform. This may save you a sizeable amount over time compared to saving directly with a number of different companies.

The financial services world is complex and it pays to simplify. A LISP provides an easy and simplistic solution. Speak to your advisor.

The South African Reserve Bank (SARB) cut interest rates by another,25% on Thursday which brings the total reduction in interest to 3% for 2020. The repo rate which is applied to banks is now 3,5% and the prime lending rate applied to consumers is now 7%. The lowest in 4 decades.

So how does this affect us?

Great news for indebted households –  3% off debt costs is a significant reduction in living expenses: A mortgage bond of R 1 000 000 at the beginning of the year had a monthly instalment of R9 650 per month when the prime lending rate was 10%. After the additional rate cut on Wednesday, the same bond now costs R7 752. That reduces the debt by R1 898 per month.

Add to this the savings on other forms of debt such as overdrafts, credit cards and car instalments household living expenses should be far better off. 

Sad news for pensioners – It’s a case of ‘one man’s meat is another’s poison’, for those households which depend on interest-bearing savings for an income. A pensioner with R 1 000 000 savings is now earning R2 500 less.

What you could do – Paying off your debt with savings is an ideal plan for those whose income was not affected by the COVID-19 lockdown. Not many South Africans are in this position but even if you can allocate a small amount to paying off your debt more quickly this will pay dividends in the future. 

Pensioners could look to Unit Trust Income Funds which focus on investing in cautious assets such as bonds and cash. When interest rates go down bonds tend to go up. Be aware of the fees that are applied as your return is net after costs. RSA Retail Bonds may also be an option with no fees at the current top rate of 8%.

The saving grace for us all is that inflation is way down to 2,1% – the lowest in decades which is a direct reflection of how the lockdown has affected the economy. We should brace ourselves for taking every opportunity as we navigate through the devastation of this pandemic on the global economy.

In a depressed economy returns on various investments are weak if not negative. The South African Stock Market year to date is -2,3% with a total return of 0,6%. Fees become more noticeable when returns are low as they appear to reduce your returns leaving less for income and or growth into the future.

Fees are effectively a reduction in yield                                                 

This means that if you earn 10% and your total fees are 2%, you get 8%. To get an idea of the impact of fees over time – R100 rand over 10 years gets you R20K @ 10% and R18K @ 8%.

Here are the components of fees:

The Service Provider of your investment Charges on average 0,5% per annum for the administrative work needed for your investments. Providing information and technologies to keep you in touch with your investment.

The Financial advisor who helps you to make appropriate choices on your investments can charge up to 1% per annum on the value of your fund.

The Fund manager who your invest according to a specific objective which you decide to invest in charges between 0,5% and 2% depending on the type of fund.

SARS also has a part to play in reducing your yield as all the fees have VAT applied at 15%. SARS also taxes your returns and collects on capital gains as well.

You could save on advisor fees by investing directly. The downside is that you could end up with an investment which costs you more because of wrong choices.  

You could save on Fund manager fees by investing in passive funds. Investments like Exchange Traded Funds and tracker funds offer the average performance of the basket that they represent. The cost is generally lower. The downside is that your returns will never be better than the average. 

You could save on Tax by investing more wisely in certain ways to limit taxes. You will need a good understanding of the various tax breaks on certain investments to take full advantage.    

It comes down to the value you perceive. It’s not only the returns that you need to be focussing on when assessing fees. The value proposition also lies in the appropriateness of the investment aligning to aspects like tax advantages and avoidance of estate duty and other costs. There are certain structures which improve your investments in more ways than return.

So be aware of the full value proposition of your fees. They are justified if they add more value to your investments than you can.

A retirement annuity is an investment for your long-term financial future. It is the vehicle which will provide an income for you once you retire. South Africans do not have a safety net to fall into. You are on your own despite the number of years you have paid your taxes to the economy. The COVID-19 pandemic has pushed those who don’t have ‘emergency funds’ to consider cashing in on their investments to survive the devastating financial impact on their lifestyles.

Your contributions reduce your tax

 Regulations allow contributions towards a retirement annuity to be deducted up to 27,5% (including pension contributions) against your taxable earnings.

So, if you earn R100 000 you can deduct up to R27 500 of contributions toward retirement funds reducing your taxable earnings to R72 500. So there is a huge benefit(

if you can afford it),to contribute the maximum. Effectively, you get a refund at whatever your tax rate is. If you pay 40% tax you get back R40 from every R100.

Your returns improve

The returns received in your retirement annuities such as dividends, rental income and interest from bonds and cash are all exempt

from tax. This significantly improves the compounding value of your retirement annuity into the future. If you invested in an endowment you will pay 30% to SARS

and if you invested in a unit trust or a money market fund you will pay back at your tax rate. 

Options during the Lock Down

Your retirement annuity is only accessible at age 55 at which stage you can access one-third of the value subject to tax. The remaining two-thirds have to be invested in a pension, of which there are many options. The resulting income will be subjected to tax. So, if you are considering your retirement as a form of relief is aware of the tax implications. 

• If you are 55 plus you can draw your third and then invest in a living annuity. If the two-thirds is below R125 000 you can then cash in subject to tax. 
• If your retirement annuity is under R125 000 you can cash in subject to tax.

Retirement annuities come with restrictions which have tax advantages but are restrictive when it comes to accessing the cash. 

My view is we should be allowed to access the full funds just as employees of pension and provident funds can when they leave their employers. Why not?