Finweek English Edition - - LETTERS -

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.

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