It’s time to start saving

You might be putting off saving until your circumstances change but shifting your mind set could actually be key to securing your financial future. Seasoned financial planner Michael Haldane shares his insights.

be loosely defined as delaying current consumption for future use by purchasing savings products whose benefits one will enjoy tomorrow. ‘The growth experienced in your savings is derived from the interest earned over a period of time,’ he adds. Reasons for saving vary from person to person and can range from short term goals, such as university fees, buying a house, a wedding or a more long term goal like retirement. ‘It goes without saying that savings and investments are inseparable twins that move hand-in-hand. Depending on your underlying reasons, preferences, time horizon, unique and liquidity needs, tax considerations, legal and regulatory requirements’, below, Haldane provides a list of the most common investment products you can save into and can be accessed through several investment platforms.

SHARES

Share investment is owning a proportionate portion in a company, where the shareholder earns a return through share price appreciation and dividend payment. The investor however is subjected to Capital Gains Tax. Shares are commonly traded on stock exchanges such Johannesburg Stock Exchange, Dow Jones, New York Stock Exchange etc.

Fixed income (Bonds)

These are debt instruments that pay interest or coupon payments at defined intervals while the principal amount remains invested until maturity. Maturity of these debt instruments varies from 90 days to 30 years. They can be traded over the counter (OTC) via established investment banks and exchanges.

Property investment

This is a form of investment where your savings can earn considerable interest, however this asset class has a very longterm time horizon relative to other investment asset classes. One can invest into this asset class either directly or indirectly through Real Estate Investments Trusts (REITS).

Unit TRUST

A unit trust is a flexible investment product that gives one access to financial markets at an affordable rate relative to buying shares directly at the stock exchange. Each unit is divided into equal portions called units. However, just like shares, they attract capital gains tax upon withdrawal. Generally, the minimum investment could be a lumpsum of R20 000 or a monthly debit order of R500, depending on the investment platform used.

derivatives INVESTMENTS

Derivatives are financial contracts that largely derive their value from an underlying asset. Derivatives are mostly used in commodities such as oil, gold etc. They are sold via OTC or through exchanges.

Endowments

These are fixed term investment products with a minimum of five years or more. Endowments invest largely into unit trusts. What makes this investment avenue unique is that the income tax and capital gains are taxed within the endowment structure and not in the hands of the owner. This is at the insurer’s effective tax rate of a flat 30%.

OFFSHORE INVESTMENTS

Offshore Investment is another form of saving where you can keep your savings in a jurisdiction other than South Africa. In this current economic environment offshore investment has proven to be the most popular investor choice.

Narrowing down to retirement products, one can invest into the following retirement savings options:

retirement ANNUITIES

As enshrined in the Pension Fund Act of 1956, a retirement annuity is a tax effective investment vehicle modelled for the following investors:

Self-employed individuals be it in the formal or informal sectors of our economy.

Individuals who have no access to workplace, pension or provident fund.

Individuals who want to supplement their pension or provident funds.

Individuals who earn sizeable amounts of non-pension income, such as rental income and interest.

One can only access a third of their investment at the age of 55 years. The remainder needs to be transferred to an income generating annuity such as Fixed or Living Annuity. A Retirement annuity can be transferred to another retirement fund.

Living ANNUITIES

A living annuity is a unit trustbased investment platform where an individual’s ‘pension’ money is invested into a diversified unit trust portfolio and a taxable income is drawn from the portfolio. According to the Pension Fund Act, the income level allowed is set at between 2.5% and 17.5% of the capital balance per annum. The income is paid annually, quarterly or monthly depending on one’s individual requirements.

Fixed ANNUITIES

With a fixed annuity one basically gives the money to an insurance company who in turn guarantees to pay a monthly taxable income until death. There is minimal risk in following this route. The downside however is that income payments cease upon death and the capital is retained by the insurance company. The income is a fixed amount and can be structured to keep up with inflation.

These are just some of the few mechanisms you can use to start your savings journey.

No matter how young you are, where you come from or how small your saving could be, Haldane recommends embedding the priniple of saving into your lifestyle. ‘As the proverb by John Heywood goes, “make hay while the sun shines”.’

‘it goes without saying that savings and investments are inseparable twins that move hand-in-hand’