READERS/ADVISERS EXCITED ABOUT RISK
Thank you for all the replies to our call two weeks ago that investors should be prepared to take a bit more risk – even for their retirement. TAX ON INTEREST ECKERSLEY AND DE JAGER point out to us only R33 000/year of the interest earned on retail bonds is tax-free. You’re quite right. But note that around R160 000 of the interest earned per year will be taxfree, regardless of the source – provided it is the only source of taxable income.
This works more or less as follows. Interest income of R160 000 minus the tax-free portion of R35 000 for people older than 65 leaves you with a taxable income of R125 000. Deduct from that all your medical expenses and medical aid contributions. Everything is deductible from the taxable income of the main member. A family in which the main member is older than 65 will find the annual medical expenses are probably at least R35 000/year. That leaves you with a taxable income of R90 000 despite your interest income of R160 000. That, by the way, is 8%/ year on R2m.
Of course, your tax rate and circumstances will change, as Eckersley and De Jager are implying. You’re quite right – but the fact remains you mustn’t be so obsessed with the idea you may only have R35 000 of tax-free interest that you want to reduce your retail bond investment. Look at the whole package.
Financial advisers don’t earn commission on RSA retail bonds and are therefore sometimes loath to recommend them. But then you should try to get other tax advice. To me (but I’m no tax expert) it looks as if a couple of 65 or older could invest a total of R3,25m in those bonds for an interest income of R260 000/ year and still pay little or no tax on it. FINANCIAL ADVISERS MAY NOT RECOMMEND MUCH RISK ROCCO CARR, of Glacier Asset Managers, makes the very important remark that the prescriptions of the Financial Services Board and the ombudsman can be interpreted so strictly that the taking or recommending of too much risk can land advisers in hot water. Thank you for that observation.
I have on two occasions invited advisers to come and look at my affairs and make recommendations. By the time we were halfway through my risk profile questionnaire I found it so ridiculous I said we should rather go and have a glass of wine.
It doesn’t look as if the questions and answers helped the advisers to avoid the traps in Sharemax and PICvest. After all, the 12,5%/year return was “guaranteed” by Willie Botha and André Brand. Apparently the “guarantee” was good enough for the questionnaire and it wasn’t necessary to look critically at the product. We’d like to hear more about the question of the prescribed list and risk profile from financial advisers. WE PROVED BENEFIT OF RISK GRAIG GRADIDGE, of Gradidge-Mahura Investments, not only agrees with our recommendation of a bit more risk. He also attaches a recent newsletter showing clearly how much benefit can be obtained from a little more risk. We’re publishing one table from its newsletter. It’s worth more than a thousand words. The table is easy to understand. The portfolio of the investor who wanted no risk and who invested his R1m in 2000 at the then ruling 9,9%/year is still worth only R1m and his monthly income is still R7 552. The portfolio of the investor who started off with a good dividend fund in 2000 is now worth R4 068 910 and his monthly income is R10 057 in tax-free dividends.
Yes, he started off with only R3 160/month versus the investor with the low-risk interest rate – that was perhaps too little to live on.