Question

My husband and I have finally reached the stage in life where we have some money left over at the end of each month.  I would like to invest this wisely and need some guidance. We are both in our mid 40s and earn decent salaries.

Answer

I would strongly recommend that you speak to a financial advisor who can do a full audit of your finances and help you clarify your short, medium and long term goals.  You can then construct an investment strategy to meet these goals.

I will, however, run through a few of the factors that you should consider when you have this discussion.

Debt

Before setting up an investment strategy, you need to get rid of short- term debt. If you have any car loans or overdrafts, I would strongly urge you to clear them.  There are very few investments that provide an after tax return that is better than what you are paying on short term debt.

Tax

You mentioned that you and your husband are earning good salaries. It is therefore important that you take tax into account when you structure any investments.  By using the correct structures, you can make a significant increase to the value of your investments through the tax savings.

I will run through some of the structures that you can consider when making an investment with a term of more than five years:

• Retirement annuity

You are allowed to invest 27.5% of your taxable income into retirement savings and have that amount come off your taxable income. This will give you an immediate tax break on your contributions. 

For example, if you are paying tax at a rate of 40% and you invest R1 000, You’ll get back R400 from the receiver revenue when your tax is assessed.  In the meantime, the full R1 000 would be growing in a tax free environment in the retirement annuity.

• Tax free investment

You are allowed to invest R36 000 a year into a tax free investment. The advantage here is that there will be no capital gains tax on any growth. This is a fantastic vehicle for building up long term wealth.

You should be careful about using it for short or medium term savings as you are only allowed to invest  a maximum of R500 000 in your lifetime. 

• Endowments / Sinking Funds

If your tax rate is above 30% or is likely to be above 30% when you want to access the investment, I would recommend that you consider investing through a structure like a sinking fund or endowment. 

These are  wrappers for housing your unit trusts or share investments, but the advantage is that you will only pay tax at a rate of 30%.  This means that the CGT that you pay on any growth is 12% instead of a potential 18%.

In addition to the potential 4% saving in CGT, by housing your investments in a structure like this you can bequeath them to a beneficiary and save a further 4.025% in executor fees when you pass away.  The transfer of this investment to your beneficiary will also not be subjected to the delays that would happen if  we went through the normal process going through the master’s office when you pass away.

Offshore investments

Most of us who are members of retirement funds or who own property will find that the bulk of our wealth is concentrated in South Africa.  It is never a good idea to have all your wealth concentrated in one country, so you should consider moving some of your investments offshore. 

The amount that you have offshore depends on your personal circumstances but typically you should be aiming at having between 25 and 45% of your assets located offshore.

There is a very practical reason for building up an offshore nest egg. Most of the retired people I consult to have children living overseas. They typically visit their them and grandchildren for an extended period every couple of years.   By having an offshore investment that they can access when they visit, they will not be as badly affected by any  short term volatility of the rand.

It is a very easy process for each of you to invest R1 million a year offshore.  When you do invest offshore, remember to use a structure like a sinking fund or endowment.  Not only will this save you on CGT and  make the inheritance easier, you’ll also be protecting yourself against being charged any potential inheritance taxes that may be levied offshore.