Wealth Management

Jenny Williams
Senior Servicing Consultant

 

 

 

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Maturing, withdrawing – or not – and investing in different investment vehicles

This is the fourth article in a series on family financial planning and the importance of professional advice in structuring your investments to meet your family’s specific needs and goals. 

We look at some of the more commonly utilised investment vehicles on the  maturity and the realisation of the capital proceeds.

 

 

Endowment policy

An endowment policy is a common and useful vehicle for both contractual and lump-sum investing.  Constructed in terms of the Long-term Insurance Act, an endowment has tax benefits for any investor, which can include both individuals and juristic entities (i.e. companies and trusts) whose tax rate is higher than 30%. 

Endowments have a minimum investment period of five years and at the end of the period, the proceeds together with any capital growth are payable to the investor without any tax liability arising in the hands of the investor.  Any growth, whether it be interest income, or capital gains is taxed within the endowment policy at a set rate of 30%.  This equates to a capital gains tax rate as low as 12%, whereas the maximum capital gains tax rate in the hands of an individual is 18%.

An endowment is relatively restrictive (though not completely inaccessible) during the first five years, but once it has achieved this minimum term, the proceeds can be accessed (and repaid) from then on.  This makes it a practical mechanism for discretionary savings (discretionary and compulsory investments have been discussed in previous articles) providing a regular withdrawal (and we’ve specifically not called this an income), or for providing a contingency or specific project fund (such as cars and geysers breaking down, or a child’s university course). 

Tax Free Savings Account (TFSA)

Tax Free Savings Accounts are another very useful and tax efficient method of investing up to R36 000 per annum, with a maximum combined contribution limit of R500 000.  Any interest income or capital gain achieved on the investment is tax free in the hands of the investor and withdrawals can be made free of tax, provided that both the annual limit and the maximum lifetime contribution are adhered to.  A TFSA has no specific duration or maturity date. 

 

Retirement Annuities

Contributions to a retirement annuity are tax deductible in each tax year (total contributions to all retirement funds including retirement annuities, pension and provident funds are limited to 27.5% of taxable income or R350 000 whichever is the greater).  No income tax on interest or capital gains tax arises in the hands of the investor in a retirement annuity.  Unlike an endowment, there is no tax levied within the investment portfolio, in the hands of the life insurance company. 

On maturity at age 55 years or older, up to one-third can be taken in cash (taxed as per the retirement tables) with the balance being required to transfer to either a life or a living annuity, providing an income thereafter.  

Unit trusts

Unit trusts – both local and offshore – have no limits on contributions (subject to exchange control regulations on the offshore products) or withdrawals, and investors may therefore access them freely.  On any disposal of funds, any capital gain realised, will attract capital gains tax subject to the R40 000 annual exemption on gains in the hands of an individual investor.  Any interest earned or dividends received will be subject to income tax.   

Investments into direct equities do not have any maturity date but will be subject to tax on dividends and interest and capital gains tax on the capital gain achieved on the disposal of any holding (annual exemptions excluded).  

Investments into direct equities do not have any maturity date but will be subject to tax on dividends and interest and capital gains tax on the capital gain achieved on the disposal of any holding (annual exemptions excluded). 

Exchange Traded Funds (ETFs)

ETFs likewise have no maturity dates although the underlying instruments themselves may well have.  Any capital gain achieved on the disposal will be subject to capital gains tax (annual exemptions excluded).

RSA Retail Bonds

RSA Retail Bonds offer investors attractive interest rates over two, three, or five-year fixed periods, with the interest earned being subject to normal income tax.  On maturity, there are no capital gains tax implications.     

Fixed Deposits

Fixed Deposits are offered by banking institutions and usually range from six months to five years.  Interest income can be paid monthly or on maturity.  Any interest income earned will be taxed at normal income tax tables and there are no capital gains tax implications.   

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There are numerous other structured investments offered in the market with specific maturity dates which can be included in investment portfolios. 

Even after selecting the most appropriate investment products, the question remains as to how best to construct and utilise the maturity or withdrawal proceeds, determining the most suitable strategy of meeting the needs and objectives of the family financial plan.

 

At this point the assistance of a professional financial planner should be sought.  If conducted with GTC, an experienced financial planner will then utilise TrueNorth, GTC’s sophisticated in-house financial planning software, to assess your needs and determine the probability of meeting your specific goals and objectives, and how best to do this.

All too often investors merely ‘roll over’ the proceeds of a maturing investment, without sufficient cognisance of the prevailing circumstances and market.  Alternatively, inappropriate changes in asset class and investment vehicle, as well as asset class selection, are common errors GTC advisors see regularly.  

For example, withdrawing from (say) an equity based endowment because a ‘maturity date’ has been reached, and transferring this to a (say) fixed deposit – at a time when equity markets have just fallen, merely locks in the losses, and forfeits all of the advantages the endowment structure held in the first place.   

Please contact your GTC financial planner on 010 597 6800 or wealthmanagement@gtc.co.za for assistance, in not only to  discuss the different investment vehicles, but also to combine this with appropriate asset class selection and tax structuring.