Short term solution in the current environment

Our economy is battling in the face of high inflation and investment options are very challenging. A great place to invest in the short term is the money market which can be accessed at banks and all financial service providers. Interest rates are on the rise with the last hike of 0,5% adding to the previous two of 0,25%.

There aren’t too many investments in the current markets which will fetch a return of around 6% with a low risk of losing your money. I say low risk because there is an extreme possibility though not likely that the bank where your investment is made could run into financial trouble as was the case of Africa Bank a few years ago.

What is it all about?

A money market account trades in bank instruments called “paper”, such as Treasury bills, Banker’s acceptances, certificates of deposit, bills of exchange which all trade in a period of less than a year.
The money market trades at the so called ‘interbank’ level where banks lend to  and borrow from each other. These wholesale rates are higher than the retail rates offered by banks on their savings accounts.

Money markets do better when interest rates rise

The rate that the Reserve Bank lends Money to the banks is called the Repo Rate. This is now 4,75%. Banks make money when they charge above this rate on what is called the prime lending rate which is now 8,25%. Interest rates in the money market vary on the type of instruments and their maturity dates. As interest rates rise so too will money market rates move upward..

Make sure you understand the actual rate offered

The nominal rate is the actual rate of return – normally annual. The effective rate is the rate achieved by reinvesting the interest received and compounding it back into the investment.
Example:
Nominal rate of 7% per annum yields an effective rate of 8.25% over a 5 year period.
If you draw out the interest then you do not get the effective rate as it stays nominal because you are not compounding the interest.
The real rate is the difference between your interest rate and the inflation rate (currently 5,9%).

Saving in the money market is an ideal place for the foreseeable future if you need to keep your investment safe and real.

Your pensions are now taxed inclusively

Up to March this year If you were a retiree and received pensions from more than one provider each of your incomes were taxed separately. 

The provider taxed the pension on its own as if it was the only income you received in the tax year not being aware of the other income sources.

Tax is applied on total income

The problem that arose was a shortfall in tax at the end of the year because when you added all you incomes together to the tax tables for the year you found yourself in a higher tax bracket. Having paid PAYE on the various pensions at a lower rate of tax during the year resulted in a shortfall of tax owed to SARS which was never a pleasant result.

You are not effectively paying more

Based on your previous tax year SARS has now advised all pension providers of the tax rate that should be applied. It may seem that by paying more tax monthly you are paying more – not so.. the effective rate implied should result in a nil amount owing to SARS at the end of the year.

SARS wins

Whilst this new implied tax rate avoids a shortfall for you it also boosts the collection of tax during the year. SARS now is collecting monthly during the year instead of waiting for your tax return at the end of the year when only then you pay the shortfall due.