Welcome to our exclusive series of personal – and business – wealth management insights from Ajay Wasserman, Founder and CEO of the Fio Group. In this article, he discusses the different types of domestic savings products.

There are numerous savings products on the market, and it gets confusing for people to look at all these different types of saving and investment vehicles. Also, there is usually a lot of confusion surrounding tax implications behind the savings models.

 

Different types of investments

Unit trusts

A unit trust is a form of investment that provides you with a relatively inexpensive means to gain access to the financial markets. The funds you invest are grouped with money from other investors. Investment managers pool all the money and purchase causal investments which are then divided into equivalent slices called ‘units.’ The units can then be allocated to you based on the amount of money you’ve invested.

Endowment life insurance policies

This is a specialised type of domestic savings policy. It’s common for the policy to be linked to a term life insurance. The policyholder may decide how much money they want to contribute monthly. Furthermore, based on the premium, you can receive a guaranteed pay-out (known as an endowment) when the policy matures.

 

What is term life insurance?

This is a type of life insurance that guarantees payment of a death benefit to the individual’s beneficiaries should they die within a certain period. The premiums are based on the insured’s age, life expectancy and health status.

  

Tax-free savings accounts

“Then, we get a tax-free savings account. All of the growth within the tax-free savings account is free of any taxes, but there are certain limitations to what you can invest in the account. At the moment, we are only allowed to invest R500 000 over our life into a tax-free savings account and only R36,000 a year meaning that works out to R3000 per month you can invest into this type of savings account.”

 

Retirement Annuity

There are also retirement annuities that you can order via a life insurance company or a discretionary investment platform a LISP (Linked Investment Service Providers) platform where you can invest your retirement funds. “The costs of the LISP platforms are so much better than opting for an RA through a life insurance company. The reason for this is that life insurance companies try and pay their advisers a lot of commission to promote that product and also to motivate the financial adviser to sell that retirement annuity they receive a significant amount of commission. So, that pushes up the effective annual cost of your investment.

I would suggest that you use a LISP platform such as Allan Gray, Investec or Sanlam Glacier or one of the other LISP platforms in which the cost is very low. Furthermore, you’ll get direct access to the fund manager. There’s a small platform fee, but overall, it’s the most economical way to invest your retirement savings.

However, it must be noted that the whole retirement system is regulated by regulation 28 of the pension funds act meaning that there’s a lot of limitations of asset classes to which your investment can be exposed. For instance, you can’t have more than 75% equity exposure in your investment or more than a certain amount of offshore exposure. Although, all the growth within that investment is also free from capital gains tax and dividends withholding tax on interest tax.

The premiums that you invest in a retirement annuity will be tax-deductible, but you will pay taxes the moment you retire so you can only access that money from 55 years of age. Once you do have access to your retirement annuity and can then retire from that savings plan, you would only have one-third available to you as a cash lump sum withdrawal. The other two-thirds would have to be reinvested for an income into a living annuity; there are no other choices; that is what you have to do. On the two-thirds income that you reinvest, you would pay income tax on all of the monthly withdrawals within retirement according to the tax tables at that time.

So, basically, you are exposing yourself to government regulations. They will force you to pay taxes on your retirement withdrawals from your living annuity according to the tax tables 40 years from now. I would suggest that you do your research correctly: always speak to a registered and qualified financial adviser to assist you with these investment decisions. Make sure that they are independent financial advisers (IFAs).

You don’t want to necessarily talk to a person who works for a specific insurance company because they can only provide you with the product that they are selling, meaning they will always promote that product, first, before looking at other products on the market. So, make sure you see an IFA who has licences to sell all of the products on the market. They don’t receive an extra commission for selling one product over another there if there’s an equal market and they will really look for the best product in the market for your needs

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